Ross faces tough test running LSE Curve

Andy Ross’s appointment as chief exec of LSE’s Curve Global,like that of Pep Guardiola as manager of Manchester City, was one of the worstkept secrets in the business.

It is tempting to draw further comparisons between thedapper managerial guru and Guardiola but the obvious one is both face seriouschallenges.

Ross’s appointment is undoubtedly a boost for the ambitiousCurve project, coming more than three months after the British exchange groupsaid in mid-October it was looking for a chief executive.

The chief executive vacancy was the major question markshanging over the project as it gears up to launch, slated for the secondquarter

Ross is unusual in that he is a derivatives guy withexpertise on both sides of the listed versus over-the-counter divide, havingworked in futures before moving into swaps clearing more recently.

This breadth is important given the chairman of the venture,Michael Davie, is definitely from a swaps background.

The appointment this week of futures expert Cathryn Lyall aschief operating officer gives the senior management at Curve a nice balancebetween futures and swaps.

This will likely be crucial.

Curve plans to challenge the two silos of European futurestrading -- ICE Futures Europe in the short-end of the curve and Eurex inlonger-dated contracts – by offering savings through a new clearing service fromLCH.Clearnet, which is majority-owned by the LSE Group, called portfoliomargining.

Portfolio margining is a technique whereby clearing housescalculate the net exposure across a group of assets with similar attributessuch as interest rate swaps and interest rate futures.

The LSE hopes the launch of its portfoliomargining service, called LCH Spider, will make Curve compelling as it willenable savings for clients by allowing them to offset the futures they trade onCurve (and clear through LCH) with the swaps already cleared in LCH’s Swapclearservice.

LCH. Clearnet’s Swapclear is the world’s main clearing housefor interest rate swaps, holding more than 90% of the global market.

The power of portfolio margining, however, is a moot point.

Reports have claimed the value of savings delivered bymargining can be as much as two thirds or three quarters for certain clientsbut banks have in private questioned these figures and said it can be of onlymarginal importance to most clients.

Eurex launched a portfolio margining service in mid-2014,offering much the same proposition as Spider, with the backing of Citigroup, Commerzbankand Morgan Stanley (including a nice quote from one Andy Ross) but this servicehas not taken off.

The LSE has made decent progress on the client front. BNPParibas became in late January the seventh investment bank to sign up to usethe platform, after Bank of America Merrill Lynch, Barclays, Citigroup, GoldmanSachs, JP Morgan and Societe Generale stumped up their cash in October lastyear.

The inclusion in the group of CBOE Holdings is alsointeresting and hints at Curve Global (to give it its proper name) looking atthe US market or to move aggressively into options.

The big unknown, at this stage, is what will Eurex and ICEFutures Europe do to counter the threat of Curve.

Fee cuts would be an obvious reaction but a more ambitiousresponse would be to look to clear their futures into LCH.Clearnet and offersome of the same benefits that Curve might offer.

The LSE has said it would be happy to support that kind ofarrangement under its pledge to support the pro-competitive principle of openaccess.

It would be interesting to see one of the incumbents takethat step.