Nasdaq to shut NLX derivatives platform

LONDON, Jan 31 (IFR) - Nasdaq will wind down its London-based interest rate derivatives exchange, NLX, amid flagging volumes since the platform’s 2013 launch, with April 28 set to be the last trading day for the exchange.

The company confirmed the closure of the business during its fourth-quarter results presentation, at which it revealed a quarterly pre-tax loss of US$$404m across the group.

Clients will be gradually offloaded in the coming weeks.

The decision to close the interest rate futures business comes less than four years after Nasdaq began offering a range of copycat contracts including three-month Euribor, sterling and long gilt futures, as well as Schatz, Bobl and Bund contracts. Volumes struggled to get off the ground, however.

The most active NLX contracts, referencing three-month Euribor, had open interest of around 42,000 contracts as of the end of December. By contrast, InterContinental Exchange’s suite of futures referencing three-month Euribor had open interest in excess of 3.3m contracts.

Through its NLX platform, Nasdaq was positioning to take business from Liffe after the UK exchange merged with ICE. As a result of that tie-up, clearing of all Liffe contracts shifted from LCH.Clearnet to ICE.

LCH’s portfolio margining service that allows clients to net listed and OTC derivatives was a key selling point for NLX in attracting dealers, which have over US$200trn of cleared OTC swaps at the London-based clearinghouse. LCH’s Spider portfolio margining service went live for short-rates contracts last May, but plans to extend that service to long-rates contracts are still awaiting regulatory approval. With no sign of an imminent launch, Nasdaq board members took the decision to cut the service at a January 25 meeting.

Many participants anticipated a widespread shift from over-the-counter swaps to listed futures in response to sweeping reform of the US$544trn swaps market. Vanilla contracts have been forced into central clearing and onto electronic platforms, hiking the cost of trading for many participants.

That shift has not happened, however. According to a study from the Bank for International Settlements, exchange-traded derivatives, which enjoyed rapid growth until 2008, have shown no clear increase in activity since 2009, when the G20 agreement sparked expectation of a shift towards listed futures products.

Against expectations, average daily turnover in OTC derivatives over that period has increased - some believe as a direct result of the shift to clearing, which addressees counterparty risk concerns. The survey found that the OTC portion of interest rate derivatives activity has jumped to 33% from 20% over the last decade.

Despite the closure, Nasdaq will continue its commitment to fixed-income derivatives, including its recently rebranded Treasury platform. Some of the six employees affected by the closure may be moved to other parts of the business.

The service attracted 12 general clearing member clients, including Bank of America Merrill Lynch, which was the latest to sign up in Q4 2016. (Reporting by Helen Bartholomew; Editing by Ian Edmondson)