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Exchanges Modify, Create Products To Comply With New Rules

As the Dodd Frank Wall Street Reform and Consumer Protection Act rules continue to come into focus, trading exchanges are modifying the way they do business in order to better comply with current and anticipated rules and regulations. The latest move came from CME Group, which last week announced the launch of CME Direct, a new technology offering side-by-side trading of exchange-listed and over-the-counter (OTC) markets.

CME Group, owner of the New York Mercantile Exchange (Nymex), said CME Direct will initially support trading of CME Group's benchmark energy futures markets alongside over the counter (OTC) energy swaps through "leading inter-dealer brokers" (see related story).

The exchange-listed products on CME Globex that may be traded through the CME Direct technology include Nymex WTI crude oil, Nymex Brent, DME Oman crude oil, RBOB Gasoline, New York Heating Oil and the Henry Hub Natural Gas futures contract. These products are part of the CME Group energy complex, which has average daily trading volumes of more than 1.9 million contracts.

Michel Everaert, managing director of OTC Solutions for CME Group, said by combining brokered OTC markets with CME's clearing and straight-through processing (STP) platforms like ClearPort and ConfirmHub, CME Direct is offering "the first global, fully automated front-to-back-office platform" for trading CME listed and OTC energy products.

"CME Direct is a big step forward for markets to comply with current and anticipated market regulations, including those proposed under the Dodd-Frank Act and MIFID that call for more transparency, automated trading, data reporting and clearing in OTC markets," said Everaert.

CME said it is licensing the CME Direct technology to inter-dealer brokers to offer trading of global OTC oil markets, including Marex Spectron, Tradition and Tullett Prebon. The technology will allow traders to execute electronically or in a hybrid, broker-assisted model on CME Direct through the participating brokers, which the exchange said will combine the benefits of electronic trading, yet retain the flexibility of voice brokering.

CME added that the integration with Clearport and ConfirmHub ensures OTC markets are cleared and processed quickly and without manual intervention, reducing operational overheads, errors and counterparty risk.

"With the introduction of CME Direct, we are offering our clients a new way to access simultaneously our listed markets as well as OTC energy markets in a fully automated trading environment, expanding access to our global liquidity and price discovery functionality," said CME Group's Bryan Durkin, COO of Products & Services.

As CME's main competitor in the energy exchange space, IntercontinentalExchange (ICE) is also working to tailor its business so that it is in compliance with Dodd-Frank regulations as they develop. ICE, which is also working on its swaps execution facility, announced in March that it would roll out an execution-to-clearing workflow for OTC swaps that support credit risk management. Known as "Plus One," this pre-clearing credit check workflow will be used for all ICE OTC clearing including its credit default swap and energy swap clearing business. Plus One was expected to commence production testing before the end of June.

Plus One is designed to meet U.S. regulatory requirements as defined in Dodd Frank, which mandates swaps trading on Swap Execution Facilities and clearing via Designated Clearing Organizations. ICE's Plus One workflow is also designed to meet the needs of the financial industry and avoid the increased operational risk inherent in more complicated proposals.

Christopher Perkins, managing director, Global Head of OTC Clearing for Citi, said, "Certainty of execution is a very important initiative for the market place, and Citi is supportive of ICE's efforts to provide leadership in this area of focus. We understand clients have differing needs with respect to latency and advocate a flexible approach to limit checking that supports a variety of trading methodologies."

Paul Hamill, managing director, Global Credit Trading at UBS, noted, "By adding Plus One to its suite of risk controls and in committing to provide every execution venue with the ability to know whether they will accept the clearing risk of its members, ICE has solidified its position as one of the leaders in the market structure of the future."

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