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Expanding its derivative index in Europe, NASDAQ OMX Group Inc. (NDAQ - Analyst Report) yesterday announced its plan to build a new interest rate derivative trading platform – NASDAQ NLX – in London. The trading platform is scheduled to debut by the first quarter of 2013.
NASDAQ NLX will operate as a separate entity within NASDAQ. However, the launch is subject to regulatory approval from the Financial Services Authority (FSA).
NASDAQ aims to offer a range of both short-term interest rate and long-term interest rate euro- and sterling-based listed derivative products. Built on NASDAQ’s Genium INET technology, NASDAQ NLX will also reap benefits of flexible connectivity, thereby ensuring low latency processes. Moreover, these products will make available the cross-margining facilities, which will further optimize customers' margins calculations.
Particularly, trading customers will now be able to offset the collateral or insurance that is held by the exchange against other positions they hold while trading and clearing over-the-counter (OTC) interest rate swaps. Consequently, traders will be able to incur less collateral in case of a trading failure. This is a significant positive feature amid the ongoing soft markets, wherein banks face stringent capital market rules.
NASDAQ has aligned with LCH.Clearnet, whose strategic derivatives clearing platform – Synapse will provide clearing and settlement services for the former’s trading contracts in London. As a result of NASDAQ’s innovative hedging and pricing strategies, the company intends to expand its OTC markets with more broad, accurate and timely settlement of trading contracts.
Gaining Competitive Edge
NASDAQ’s latest plan to launch NLX also elucidates its strategic move to attain competitive edge in Europe, where derivative giants including NYSE Euronext Inc. (NYX - Analyst Report) and Deutsche Boerse AG share majority of the market share.
Additionally, with a separate clearinghouse, NASDAQ also expects to benefit from the horizontal business model, which is in line with regulations led by Dodd-Frank, EMIR, MIFID II and Basel III, and eliminates any anti-trust concerns. Hence, we believe this innovative and pro-competition approach amid the financial turmoil in Europe could help NASDAQ attain higher efficiencies and expansion opportunities in the long run.
However, this is not the first time that NASDAQ has looked to gain a strong foothold in the Europe. Few years ago, NASDAQ had built its equities trading platform – NASDAQ OMX Europe, which subsequently turned out to be a failed attempt. Hence, we cast a neutral outlook on the company’s second attempt and currently remain on the periphery to assimilate the future development of NASDAQ NLX.
NASDAQ carries a Zacks Rank #3 that implies a short-term Hold rating, while the long-term recommendation stands at Underperform.
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