Execs: Trading firms to save in clearing deal
BY DAVID ROEDER Business Reporter
The landmark clearing agreement between the Chicago Board of Trade and the Chicago Mercantile Exchange will provide substantial savings to trading firms without compromising the safety net for futures markets, executives of both exchanges said Wednesday.
Discussing for the first time details of an agreement announced two weeks ago, the executives said savings will come from reductions in the sums that firms post for margins and guarantee funds. The money must be deposited as a safeguard against defaults and wild swings in valuations.
For firms that hedge their risk at one exchange with trading at the other, a common practice, the required deposits would fall by 75 percent, according to examples the exchanges provided.
The potential reductions could amount to millions of dollars for the largest investment banks. Further savings would accrue on labor costs, as firms will need fewer back-office workers to monitor clearing, the exchanges said.
"What this has done is absolutely reduce risk and provide significant control over risk management on the street,'' said Robert Ray, senior vice president of the Board of Trade.
With the costs to clearing firms going down, individual customers ultimately could see benefits in lower fees, he said. Clearing is the process that guarantees each futures trader can meet financial obligations.
Currently, clearing firms with membership at both exchanges shoulder increased costs to maintain separate guarantee funds and collateral pools. Kim Taylor, risk management director at the Merc, said the agreement will consolidate trading positions in one location, letting firms see at a glance the risk in their portfolios.
Taylor said the exchanges will help each firm calculate its potential cost savings.
By aligning with the Merc's clearing organization starting Jan. 2, 2004, the Board of Trade opted to end its longtime association with an independent company called the Board of Trade Clearing Corp. The exchange was angry over the clearing corporation's desire to provide services another exchange, Frankfurt-based Eurex, that wants to compete directly with the Board of Trade. |
