Five Minutes With Thomas F. Callahan

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Five Minutes With Thomas F. Callahan of NYSE Liffe US


NYSE Liffe U.S., the U.S. futures exchange of NYSE Euronext (NYX), Monday launched Eurodollar futures products to coincide with the launch of New York Portfolio Clearing (NYPC), a new clearing joint venture with The Depository Trust & Clearing Corporation (DTCC). Thomas F. Callahan, CEO, NYSE Liffe U.S. answered some questions about the launch for John J. Lothian & Co. Senior Editor/Producer Christine Nielsen.

1) How would you describe the first day of trading in NYSE Liffe U.S.’ Eurodollar futures contracts? What were the volume and open interest levels? Are these levels what you’d expected? Why or why not? What do you expect to see in coming days with the contracts?

TC: Our first day of trading was a great success and exactly as we expected. The goal for today was to verify the integrity of our systems by having a high percentage of our customers execute a number of small trades on NYSE Liffe U.S. then clear them through NYPC.

Remember, in addition to launching a new series of contracts on our exchange, we launched a new, highly innovative clearing house in New York Portfolio Clearing as well. Our customers’ objective today was to verify that all systems were fully functional, from execution through to clearing. I am pleased to report that we had an extremely high participation rate from our customers, and all NYSE Liffe U.S. and NYPC systems worked as expected.

Additionally, we had tight, tradable markets in the first five years of the Eurodollar curve throughout the trading day, and volume was around 4,000. This level of displayed liquidity on our very first trading day should give the market confidence in our ability to attract liquidity. Additional customers will be entering our market daily, which puts us in a strong position to begin steadily increasing volumes. We are very appreciative of our customers’ day-one support and we look forward to working in partnership with them to build our market in the months and years to come.

2) I know you will be introducing 2-year, 5-year and 10-year U.S. Treasury futures along with U.S. bond and Ultra bond futures products on March 28. How will this impact your IR product offering and your business overall?

TC: We are staging the launch of Treasury futures one week after the launch of Eurodollars in order to reduce operational risk. Our view has always been that volumes should begin to increase significantly once the full suite of interest rate products are live on our exchange. We believe that the combined trading and clearing offering that we debuted today has a unique value proposition for customers and we hope they’ll give us an opportunity to prove its effectiveness over the next few weeks.

3) And you are planning to list Eurodollar and Treasury options soon? Why and when?

TC: Our objective is to launch options on Eurodollar and U.S. Treasury futures in Q3 2011. The NYPC Risk team is currently building the capability to process options within the single-pot-margin methodology, so our options will benefit from the same capital efficiency as our futures. Liffe CONNECT has world class option functionality, developed to support the European STIR markets that trade on NYSE Liffe in Europe such as Euribor and Short Sterling. We will leverage this functionality heavily for our U.S. options launch and we believe that our ability to utilize the best of NYSE Euronext’s global markets will provide exceptional benefits to our customers.

4) What type of feedback have you gotten from users of the IR market so far?

TC: Customers are excited that our systems worked properly and that our first day of trading and clearing was a success. Now that our platform has been verified in the live environment, our customers are excited to begin prudently increasing their level of activity as their confidence in the integrity of our platform builds.

Again, we have worked closely with our partners at DTCC, the team at NYPC, and of course the firms themselves to coordinate today’s cross-platform launch. Customers have heard about our plans to create new capital and operational efficiencies in the market, but now they can see it for themselves in their own portfolios using their own systems. We are very excited to introduce this value chain to them and see them put it to the test.

5) Is there anything about the launch of Eurodollar futures that has surprised you? If so, what?

TC: Since we began this project, I have been continually surprised at the high level of commitment from our partners, customers and market makers. A large number of them were with us at 7:16 pm EST last night for the open, and were quoting aggressively and trading throughout the evening. We are extremely grateful for their strong level of support from our customers in launching a new market.

6) You noted in a previous interview that as of this month you will have spent two years preparing to launch your offering. In the process, you built two new companies, two separate partnerships and a brand new clearinghouse. What’s the next step?

TC: We need to build credible market share in our core products - Eurodollars and U.S. Treasuries. We need to successfully launch options on these products. We need to expand NYPC’s margin efficiencies to include customer positions. We need to continue to innovate in terms of new products, both at the exchange and the clearing level. We realize the challenges and we are addressing all of them thoughtfully and systematically.

Also, away from interest rates, we have a high profile migration of equity index futures on MSCI Emerging Markets and MSCI EAFE coming up in June. It is a huge coup for us to take these benchmark indices away from the CME and bring them into the NYSE Liffe U.S. family. Our equity team is working hard with customers to ensure a smooth migration of this open interest from CME to NYSE Liffe U.S.

7) What do you see as your exchange’s greatest strengths in these products at this point? What do you see as your greatest weaknesses?

TC: Our greatest strength is in our innovation and, in our partnerships. We have innovated at a level the market has never seen before from a start up exchange. For example, we have innovated in terms of capital efficiency at NYPC, and in terms of improved delivery protocols for U.S. Treasury futures. We have built an amazing network of partnerships at every level of our business, from our equity partners, to DTCC, to our market makers. In terms of weaknesses, we are a small, hungry, start up exchange. We still have a lot to prove, but we expect in the coming weeks and months that we may surprise a few of our skeptics.

We are committed to our innovative new model and to building lasting value for our customers. We will continue to find ways to build a better exchange and to redefine the trading and clearing paradigm in terms of efficiency, risk management and customer service.

8) What is the status of the exchange of futures for futures rule? Do you feel it is necessary for your effort to succeed? Why or why not?

TC: Although we allow EFFs, I am dubious that an EFF rule, even if the regulators mandate its adoption by all exchanges, would advance competition in any meaningful way. It might make it slightly easier for certain customers to move open interest into NYPC, which would be helpful. Beyond that, I would be really surprised if customers began actively moving OI between multiple clearinghouses by paying an EFF market maker. It is just too operationally tedious, too expensive, and too risky.