In a bid to enhance its efficiency in the US futures market, yesterday NYSE Euronext Inc. announced the commencement of repo futures market trading starting July 16, this year. However, the launch awaits requisite regulatory approvals.
Repo futures are contracts or financial instruments wherein a bond futures or forward contract is sold and simultaneously an actual bond of equal amount in the cash market is bought using borrowed money. Accordingly, the value of repo futures will be computed by NYSE using actual, fully-guaranteed Treasury or agency mortgage-backed instruments that will be transacted against cash. This business innovation has radical earnings growth prospects.
In view of above, NYSE will launch its repo futures trading through its NYSE Liffe US that comply with the Depository Trust and Clearing Corporation’s (DTCC) trademark – GCF Repo Index. Moreover, these repo future contracts will be cross-margined by other cleared products at New York Portfolio Clearing (NYPC), thus helping the company escalate its volumes generation. NYPC is jointly owned by NYSE and DTCC.
NYSE also has an added advantage since its NYSE Liffe US has the exclusive right to trade DTCC GCF Repo Index products, which further paves way for the company to tap the $400 billion GCF Repo market. Additionally, the DTCC GCF Repo Index is leading interest-rate benchmark in the US as is the London Inter Bank Offered Rate (LIBOR) in the UK.
However, LIBOR has been under investigation against manipulation charges, while the benchmark rates offered by Federal Reserve have also lost lustre following the imposition of the transaction tax on such products by Federal Deposit Insurance Corporation (FDIC). Hence, NYSE is optimistic about exploring the giant repo futures market.
Establishing a strong footing in the repo futures market appears to be a significant step to boost NYSE’s competitive leverage against arch rival CME Group Inc. (CME - Analyst Report), who is aiming to own a futures exchange in London, as reported by Financial Times earlier this week. CME Group is also aiming to get cost-efficient by merging the trading costs of its interest rate swaps and futures contracts.
On the flip side, following the fallout of its merger with Deutsche Boerse, NYSE has been aggressively seeking out innovative means and ways to amplify its market share since the past few months. As a result, the company had also announced the the European launch of a new electronic retail derivatives market in the first quarter of 2013, while also kick-starting its own NYSE Liffe Clearing in London expected between the second and third quarters of 2013. Management also aims to transfer all the derivative trades from Amsterdam, Brussels, Lisbon and Paris to London by the first quarter of 2014.
Although expenses related to building these new initiatives will likely weigh on the financials for some time, we believe that the growth actions should help NYSE by enhancing its capital and cost efficiencies, while also rendering it a competitive advantage in the peer group, besides helping it adhere to the regulatory provisions. Overall, these efforts will not only help NYSE strengthen its fundamentals, but will also aid in benefiting from a satisfactory clientele, thereby boosting the long-term operating growth potential of the company.
Currently, NYSE carries a Zacks Rank #3, implying a short-term Hold rating and a long-term Neutral stance.