When the Chicago Board of Trade and the Chicago Mercantile Exchange shelved plans last year to develop a common clearing facility, it seemed as though the era of cooperation between the exchanges that many thought inevitable in the post-Eurex world had abruptly ended. Later, when the Merc decided to embrace electronic trading as never before by allowing its flagship eurodollar contract to be traded simultaneously in its open-outcry pit and on its Globex2 system, while the CBOT was busy distancing itself from a proposed alliance with Eurex, it seemed as though the exchanges were further apart philosophically than ever.

But last December, the two exchanges took a small but meaningful step toward reconciliation when they struck an agreement to create a cross-margining facility for certain products and to offer counterparties the benefits of common banking.

The cross-margining facility will cover all CBOT and Merc interest rate products, and both customer and house accounts will be eligible. A joint committee of the exchanges and the Board of Trade Clearing Corp., the independent clearing firm that serves the CBOT, will review cross-margining opportunities between other products traded at the exchanges in the future.

The common banking provision, in addition to reducing clearing members’ collateral expenses, will reduce the potential for systemic risk to impede the settlement process, and will allow members to optimize their collateral deposits, enabling them to support a given level of futures and options positions with lower overall collateral deposits. Under the exchanges’ program, clearing members’ settlement cash flows will be netted across participating clearing organizations, which, the exchanges say, will reduce demands on credit and liquidity resources.

The January 4 launch of the euro captivated the financial community around the world—and especially at the Chicago Mercantile Exchange, which launched currency futures contracts on the euro that very day. A total of 2,926 contracts were traded the first day, counting pit and after-hours Globex2 volume, with just over 2,100 trading the day after. By the end of the week, daily averages had surpassed 3,600.

The Merc, which boasts of being the world’s premier currency futures exchange, is committed to the euro. On January 11, in fact, it launched three currency cross-rate contracts to complement its Euro FX contract—futures on Euro FX/Japanese yen, Euro FX/British pound and Euro FX/Swiss franc. Futures contracts will be traded initially only on Globex2, while options contracts are trading via open outcry during trading hours and on Globex2 after hours.

LCH To Offer European Repo Service The London Clearing House, whose SwapClear system for clearing over-the-counter swaps is scheduled to launch this summer, plans to break into yet another area of the over-the-counter market as early as the second half of this year. RepoClear is designed to offer clearing for European repurchase agreements in the same way that SwapClear will cover swaps. The mechanism is similar to that of SwapClear: When two banks have struck a repo agreement, the contract will be sent to RepoClear, which will run a series of checks on the deal and become a counterparty to the trade. From that point on, the banks won’t have any exposure to each other, but rather to the LCH. RepoClear is designed to reduce the capital requirements of counterparties and allow for easier management of credit lines and a more efficient use of collateral. Since clearing and settlement will be handled by a third party, customers could save a bundle in back-office costs. The LCH hopes to launch RepoClear shortly after it launches SwapClear, which is currently awaiting a regulatory green light from the U.S. Commodity Futures Trading Commission.

The Chicago Board Options Exchange’s board of directors voted unanimously on January 7 to end merger discussions with the Pacific Exchange after receiving a notification last December 23 that the U.S. Department of Justice would require an extensive review of the deal for possible antitrust violations.

“CBOE’s decision to terminate discussions with PCX was made strictly on the basis of our available time and resources,” says CBOE chairman and CEO William Brodsky. “We have great respect for the PCX membership and staff, [but] at this point in time…we must focus our efforts on other time-sensitive initiatives.”

The merger would likely have saved member firms a great deal of money in margin requirements and other exchange costs, but would have placed more than half of the U.S. options market on a single trading floor, prompting fears of monopoly.

The CBOE says it will focus its attention and resources on developing a screen-based trading system to compete with the newly minted International Securities Exchange, an Internet-based options exchange backed by E*Trade founder William Porter.

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