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Europe gets first cleared OTC CDF
01 November 2013
Cantor Fitzgerald and LCH.Clearnet have pioneered clearing OTC contracts for difference in the region
OTC contracts for difference
Cantor Fitzgerald and LCH.Clearnet have launched Europe’s first centrally-cleared OTC contract for difference.
The initiative follows demand from clients to reduce risk to CFD providers and is in line with regulators’ desire to push OTC derivatives onto central clearing. CFDs are typically traded over the counter which leaves the client at risk of losing money if the CFD provider becomes insolvent.
The contract was launched in partnership with Commerzbank Corporates & Markets, ING and Citi.
Central clearing of CFDs by LCH.Clearnet provides counter-party risk mitigation to the customer of the CFD provider in the event of the provider’s default. The hedge entered into between Cantor Fitzgerald and its synthetic prime brokers, Commerzbank and ING, will also be centrally cleared.
Commerzbank C&M and ING offer synthetic prime brokerage services to institutional clients, including Cantor Fitzgerald, and Citi provides clearing services to ING.
In addition to reduced counterparty risk, investors also benefit from collateral efficiencies and cross-margining opportunities by using central clearing.
Alberto Pravettoni, CEO of LCH.Clearnet’s repo and exchanges business, said: “We are delighted to be the first CCP to offer central clearing of OTC CFDs and to have worked closely with market participants to develop a solution that is tailored to their needs.
"By working with CFD providers who meet our criteria for membership, we help investors access the best market price for a trade while benefiting from reduced counterparty risk, collateral efficiencies and cross-margining opportunities between cash equities and CFDs.”
Charles Knott, director of Cantor Fitzgerald Europe, said that enhanced protection of client money is “core” to the continued success of the industry. He said that central clearing for this market will eventually become mandatory and that it will reassure clients that their funds are securely deposited in a segregated account in the central counterparty.