Interdealer broker ICAP plc (LON:IAP) and global exchanges operator Bats Global Markets, Inc. (BATS:BATS) have announced that following a successful launch of ICAP’s cleared equity basket solution in April 2015, over €212 billion of notional trades have been routed through the Bats Exchange Trade Reporting (ETR) service for clearing during the financial year ended June 30, 2016.
ICAP and Bats developed the innovative solution to solve over-the-counter (OTC) market issues surrounding the trading of European index Exchange for Physical (EFP). Prior to the solution being launched the cash/physical leg of the transaction was settled on an OTC bilateral basis, while the futures leg was exchange-traded and cleared. The service enables cash equity baskets to be traded anonymously on-exchange and cleared, deepening liquidity and broadening ICAP’s customer base.
The solution sees customers submit their equity trades through the ICAP Securities Limited (ISL) multilateral trading facility (MTF) accessed on ICAP Fusion, the company’s e-commerce portal for trading venues. ICAP then routes these matched third party trades to Bats’ ETR service to enable the cash basket to be reported on exchange and cleared through the CCP, mitigating bilateral counterparty risk.
The Bats ETR service provides reduction in counterparty risk by providing centralised clearing, a comfort during recent market uncertainty and volatility. On Friday June 24, following the UK EU referendum results, ICAP routed more than 80% of its EFP business to Bats cleared ETR services, up from the typical 60%, emphasising the importance of centralised clearing during times of market uncertainty to reduce counterparty risk. This trend is likely to continue as the balance sheet of banks, and the reduction of OTC counterparty risk continues to be a priority in financial services.
Coupled with significant settlement cost savings, this innovative solution has future-proofed this type of trading activity by ensuring it adheres to new regulations such as MiFID II and Basel III which seek to make markets more transparent and reduce counterparty risk.
In the fifteen months since launch of the EFP solution, 21 trading firms have gone live with the service, with a further 10 scheduled to go live in 2016. Over the past year, the total volume routed through the Bats third-party broker ETR service was €221 billion, with ICAP representing the majority of the volume for this type of activity.
Garry Stewart, Deputy CEO of EMEA Global Broking at ICAP, said:
Collaborating with Bats Europe, ICAP has developed a unique solution, for a market which has seen limited innovation since it was founded. The combination of our ICAP Fusion portal and strong voice broking relationships, have allowed us to provide wholesale clients with a flexible, fully cleared trading solution for cash baskets across the major European Indices. The take-up of our combined solution demonstrates the market interest for fully cleared, on exchange trading in traditional OTC brokered markets.”
Mark Hemsley, CEO of Bats Europe added:
We are delighted that our collaboration with ICAP to provide a service that helps improve market safety by reducing counterparty risk, has had such an immediate and significant impact. The solution proves that our ETR services are well positioned to help traditional OTC markets trade on-exchange and achieve regulatory compliance in the evolving trading landscape. We look forward to our continued partnership with ICAP and will continue to focus our efforts in making markets better for all of our customers and partners.”