Banks to launch European derivatives exchange

Banks to launch European derivatives exchange

Following the establishment of the bank-backed European equities trading platform Turquoise, a group of seven global investment banks are now gearing up to a launch a pan-European financial derivatives exchange - dubbed Project Rainbow - that will compete with the region's established markets, including Liffe and Eurex.

According to a Financial Times report, Project Rainbow's backers include Barclays, Deutsche Bank, Goldman Sachs, JPMorgan, MF Global, NewEdge and UBS.

The group, which was reportedly established in April 2007, is thought to be "close" to selecting a technology provider for the platform and has lined up an interim chief executive.

The new platform will initially offer trading in the short term interest rate futures denominated in sterling and in Euribor, says the report.

The board of LCH.Clearnet is thought to be meeting today to consider whether to allow Project Rainbow to clear trades through its system. This will make it possible for the new exchange to attract liquidity as brokers will be able to open a contract on one exchange and close it on the other.

However any move to allow Project Rainbow to use its clearing system could have serious implications for LCH.Clearnet, particularly as the new venture will compete directly with its largest customer Liffe.

The move to launch a derivatives exchange follows the establishment of pan-Euopean equities platform Turquoise, which is set to launch in September.

Like Turquoise, Project Rainbow is looking to take advantage of the MiFID regulations which came into force in November 2007, and the pressure applied to exchange's to open up the clearing to new competitors. Turquoise and Project Rainbow are one of a number of new competitors - which include Instinet Chi-X and Nyfix - in the region that are looking to take business away from the incumbent domestic markets.

Speaking at Finextra's annual capital markets conference Finexpo in London last week, Lee Hogkinson, CEO of virt-x, told delegates that the introduction of MiFID, combined with advances in smart order routing technology, has dismissed the idea that long-standing incumbents in the region have "any divine right to liquidity".

To compete in the emerging landscape, exchange execution venues will have to offer better value for money and strive for constant innovation by utilising technology that is big, fast and cheap, said Hogkinson.

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