Fuel for Growth
In turbulent times, interdealer brokers are looking to the safety and flexibility provided by the CME ClearPort service.
The German poet, Johann Friedrich von Schiller, once wrote that, "One can advise comfortably from a safe port." Such is the case today for many interdealer brokers who use CME ClearPort for the products and the financial protections it provides to their clients during some pretty rough storms.
Michael Prokop, a senior vice president with Amerex Brokers, says his firm has increasingly used CME ClearPort for energy trades. His firm is one of many interdealer brokers who have relied on CME ClearPort over the past year as the financial crisis rocked over-the-counter (OTC) derivatives markets and thrust counterparty risk to the fore.
"We have been able to gain access to customers that we could never have gotten before," says Prokop, adding that with CME ClearPort, Amerex clients "have an opportunity to participate in the energy markets and can more effectively manage their risk portfolios."
CME ClearPort's clearing volume has grown thanks, in large part, to interdealer brokers, who match bids and offers between large banks and other commercial businesses in OTC derivatives markets. They then route those trades through the platform, which ultimately are cleared through CME Clearing. Year-to-date, through the third quarter of 2009, an average of 504,000 contracts a day were cleared through CME ClearPort, up 21 percent from the same period in 2008.
Much of this growth stems from Wall Street's meltdown in the third quarter of 2008, as interdealer broker customers sought the financial safeguards of central counterparty clearing, says Tom Holleran, director of products and services at CME Group. Today, there are more than 200 interdealer brokers registered as clearing members with CME ClearPort with those firms accounting for 75 to 80 percent of clearing volume. "They're not just U.S.-based," Holleran says. "We are seeing more registrations from Asia. The largest growth potential is in Asia and London. We are seeing more volume from Asia, specifically Singapore, in the night hours. They are looking for additional clearing services for their clients."
Building and security
New energy products, including swap contracts based on regional electricity markets, have become increasingly popular. Holleran says more than 220 new contracts became available through CME ClearPort in 2009, bringing the total offering up to more than 700 contracts covering crude oil, natural gas, metals and other markets. Some interdealer brokers are jointly working with CME Group on new energy contracts. Amerex, for example, helped develop CME ClearPort's slate of 44 PJM Interconnection electricity contracts. Amerex, for example, helped develop CME ClearPort's slate of 44 PJM Interconnection electricity contracts.
But the main driver for firms is clearing, which has taken on greater importance following the demise of Wall Street titans such as Bear Stearns and Lehman Brothers.
"A lot of people took bilateral credit risk for granted before the financial crisis," says Ed Ditmire, an analyst in New York with Fox-Pitt Kelton. "That forever changed after a large number of investment banks either succumbed or were driven too close to the brink for comfort. CME ClearPort has a lot of answers for those people who have those concerns."
As of the end of June 2009, CME ClearPort offered approximately $8 billion in financial safeguards and $100 billion in "high-quality" collateral in margin deposits, primarily cash and bonds. Additionally "our cleared swaps are treated as regulated futures contracts, subject to segregated clearing arrangements," Holleran notes. "So in the event of a clearing firm default, the firm's customers' monies are held in segregated accounts, and so are not part of the firm's bankruptcy proceedings."
The ongoing investor interest in oil, gas and other energy markets will continue to fuel CME ClearPort's growth, says Mark Lane, an analyst with Chicago-based William Blair & Co.
"Energy as an asset class continues to gain momentum and attract capital flows, even during the drop-off" in oil and gas prices, Lane says.
Much of CME ClearPort's appeal is its simplicity and price "transparency," says Javier Loya, chairman of OTC Global Holdings (OTCGH), a Houston-based holding company for 16 independent brokers. The firm cleared about 21 million contracts through CME ClearPort during the first half of this year.
"Most OTC transactions are voice-brokered and CME ClearPort aligns well with this model," Loya explains. Through CME ClearPort, an OTCGH client such as a natural gas-fired utility can access rates for the entire marketplace, and "in a matter of minutes" see transactions posted electronically, he says.
The security of a solid clearing system is the biggest selling point of all, Loya adds.
"What we can tell clients is that if you have credit concerns, CME ClearPort is the perfect answer," Loya says. "Not only does it give you better financial integrity, it's efficient, transparent and backed by CME Clearing."
Todd Creek, chief operating officer with ICAP Energy LLC, agrees, saying CME ClearPort's straight-through processing is a key advantage.
Straight-through processing "adds efficiency to the market and reduces overall costs," Creek explains. "This avoids having unnecessary double entry, once into your own system and then again into the clearinghouse's system."
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