The Chicago-based exchange operator, which has developed exchange-traded futures with similar characteristics to over-the-counter swaps, has hired former Barclays executive Tim Stack to head up a new London office, according to a September 8 statement.
The firm is attempting to benefit from European reforms forcing certain derivatives onto trading platforms and through clearing houses, and raising collateral requirements against non-cleared derivatives. Such requirements are already in place in the US and are only just coming to Europe via the European Market Infrastructure Regulation and a revised version of the Markets in Financial Instruments Directive, or Mifid II.
FN spoke with Stack, previously head of agency derivative services at Barclays, and Eris chief executive Neal Brady about the opportunities created by regulation, the expansion into Europe amid Brexit, and hiring plans across London, New York and Chicago.
FN: What’s driving your expansion across Europe?
Neal Brady: The timing is driven by the financial regulatory reform, migrating from the US and now being implemented in Europe. The key factors driving our decision to open the London office now were market demand coming from the European client base as well as the acceleration of Basel III and financial reform in Europe.
The clearing mandates are just beginning to hit the banks in Europe and these mandates will expand to encompass the rest of the user community.
The mandate for uncleared OTC swaps requiring margin is hitting US firms now and will hit European firms one year from now – this is a big driver for people to look for alternatives like Eris, and then you have Mifid II on the horizon, scheduled to come into play in January 2018.
FN: What was appealing about Tim to Eris? And vice versa?
NB: [His] professional experience is a reflection of what it takes to succeed in the new swap market; he combines the best of OTC swaps and the best of futures.
Tim Stack: The opportunity provided by the challenges facing the industry, especially on the sellside, is a key reason I’ve decided to join Eris. Eris offers solutions to some of the critical problems facing market participants and allows clients to access transparent, deep markets in an efficient way. I have a long history of working with exchanges and clearing houses. If you look at Eris, it’s a dynamic place looking to do things which are new and exciting. Those qualities are quite attractive to me.
FN: Which clients do you want to target?
NB: On the buyside, our early adopter targets include proprietary trading groups and independent trading shops, and there are a lot of these firms in Chicago and London as well. Increasingly we’re seeing interest from real-money clients and hedgers; we have a number of them in the US market and we’re seeing more real money interest in London and Europe. On the sellside, Morgan Stanley and Societe Generale are both strategic investors and participants on the platform. We’re seeing interest from other major sellside firms as well.
We’re seeing banks “offboard” OTC clearing clients that aren’t economical. However, these clients still need to hedge their Libor exposures and we’re the natural place for them to come.
TS: Access to OTC swap markets for some major clients is challenging, and has been even more challenging for some of the smaller clients. Eris represents a great place for them to transact in a fully open marketplace to make the same hedges with firm, actionable prices.
Sometimes the banks view certain clients as not being big enough for them to set up on a given platform. In the last few years, we’ve read a lot about the banks focusing only on the largest clients. Eris allows banks to offer client access to derivatives markets for this group of smaller users.
FN: Was Brexit not a concern to basing your European operations in London?
NB: London is a vibrant trading and financial services centre and we expect it to remain so. However Brexit shapes up, we’d expect to have a continued presence in London. London will remain a major centre even if we expand to other locations in Europe.
At Eris we’re focused much more on the immediate opportunity, six months, 12 months, 24 months out. I wouldn’t take our move into London as a strategic call one way or the other related to Brexit.
TS: London is a natural place for Eris to be. If you look at the clients we focus on, they’re very well represented in London, from the professional traders to the hedge funds, to the asset managers and real money, to the banks. So as a place to start, London seems very logical to me.
FN: What are your broader hiring plans in Europe?
NB: We’re not putting out publicly specific numbers but we are actively recruiting in all three of the areas [London, New York and Chicago] where we have staff today. We’re looking to build up a team under Tim in London.”
FN: You already license your products to exchanges including Intercontinental Exchange. Will there be further licensing deals down the road?
NB: In each market, we carefully evaluate whether we want to operate as an exchange with a clearing partner or whether we want to license the Eris methodology to an incumbent exchange partner.
So the answer is yes, there could be more potential licensing deals down the road. Any country where a G20 mandate exists to migrate OTC swaps to cleared swaps and a more regulated marketplace, that’s a target market for Eris.