Much of Nasdaq’s head of transaction services Eric Noll’s time will be spent steering the ship into new waters. At the top of the exec’s to-do list is development of Nasdaq’s interest rate swap clearing business, known as International Derivatives Clearing Group.
In December, IDCG was "shadow," or mock, clearing about $3 trillion of rate swaps, according to Nasdaq CEO Bob Greifeld. As with real clearing, shadow clearing involves market participants submitting their end-of-day swap positions for settlement and margining. Nasdaq then reports back to the brokers the impact on their portfolios as if IDCG had actually cleared them.
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Nasdaq bought the majority of IDCG in 2008, betting that pressure from Washington would force banks and brokers to clear their over-the-counter trades in rates swaps at a centralized clearing facility like IDCG. While there has been much wrangling between the dealers and Capitol Hill over any new rules, a group of large dealers has voluntarily agreed to centrally clear most of their rate swaps trades. Greifeld has called potential revenues from swap clearing a "nine-figure-per-year opportunity."
"The marketplace changes are moving in our direction," Noll told Traders Magazine in October. "Given the new regulatory reforms coming from Congress, all OTC derivatives will need to be centrally cleared."
Even if that is true, Nasdaq faces stiff competition in this area. "Nasdaq will have a very steep uphill battle in penetrating swap clearing," analysts at Pali Capital reported recently. Pali said Nasdaq lacks liquidity in swaps, as well as dealer connectivity. Its competitors do not. William Blair & Company is equally skeptical of Nasdaq’s chances, noting that none of the top five dealers are shadow clearing with Nasdaq. Blair frets that Nasdaq’s position is weak, given the strength of its competitors and its unique business model. IDCG converts a swap into a future that can be traded over the Nasdaq OMX Futures Exchange, formerly the Philadelphia Board of Trade, acquired by Nasdaq along with the Philadelphia Stock Exchange. Noll notes most of the participants are the dealers’ customers, but the dealers are slowly coming on board.
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