Nodal Exchange CEO Discusses Recent DCO Approval by CFTC (Energy Metro Desk)
Commentary by Bob Zwirb
In the latest issue of Energy Metro Desk, Nodal Exchange CEO Paul Cusenza discussed recent CFTC approval allowing the Nodal Exchange to operate a derivatives clearing organization.
By replacing its current London-based clearinghouse, LCH.Clearnet, with Nodal Clear, Nodal Exchange will "soon be a true, vertically integrated U.S. exchange clearinghouse" Mr. Cusenza asserted. Going forward, he noted that Nodal Clear is "looking to expand and broaden [its] product offerings significantly" and has a "key interest in the energy sector generally."
Nodal Exchange is scheduled to switch to DCO status and replace LCH.Clearnet as Nodal Clear on October 19, 2015.
Commentary
An issue that has created more than a fair amount of tension in the futures industry centers on the lack of fungibility of futures contracts,i.e., that futures transacted and cleared on one exchange cannot be closed or cleared on another. Futures contracts are creatures of the exchanges - indeed, the intellectual property of such entities. Clearing can take place only on the clearinghouses affiliated with such exchanges. In other words, the lack of fungibility is due in part to the fact that clearing is an activity that is captive to the exchange where the trade is first made.
Dodd-Frank was intended to change that, at least with respect to swaps, so that, in the words of former CFTC Chair Gary Gensler, "OTC derivative trades and open positions are fungible and can be transferred between one exchange or electronic trading system to another." See "CFTC chief urges competition in derivatives clearing," Financial Times (July 22, 2009).
What's interesting in this case is that the CFTC's Order expressly limits Nodal Clear's activity as a registered DCO "to clearing contracts executed on or through its affiliated designated contract market, Nodal Exchange, LLC," thus precluding the kind of competition that Mr. Gensler and proponents of fungibility have called for in the past.