Eris Exchange about to launch

(Crain's) — A new Chicago exchange created by five local trading firms will begin to trade interest rate-swap futures Monday, with clearing provided by CME Group Inc.

Eris Exchange is being launched by DRW Holdings LLC, Getco LLC, Infinium Capital Management LLC, Chicago Trading Co. and Nico Holdings LLC, which all have also invested in the new entity. The firms tapped Neal Brady, a former CME executive, as CEO. Eris arrives on the scene just after President Barack Obama signed a sweeping financial regulation bill that, among other things, will force more derivatives to be traded on exchanges and cleared in the public domain as opposed to private, over-the-counter transactions. Mr. Brady told reporters on a conference call that Eris will provide the transparency, additional competition and central clearing that regulators have been advocating.

“The timing couldn’t be better, given the financial reform bill that got signed into law last night,” Mr. Brady said.

In the past, trading firms and Chicago-based CME, the biggest derivative exchange operator in the world, sometimes expressed different views of regulators’ efforts to push over-the-counter derivative trading to exchanges and central clearing. While the firms favored it, the CME at times said it feared such a mandate might push some business overseas. CME will provide the clearing services through its CME Clearing unit.

“By offering clearing services for the interest rate futures contracts executed on Eris, their customers are able to benefit from CME Clearing’s proven risk-management track record,” the exchange said today in a statement.

The founding firms will be “committed market makers” for the platform, the firms said in a press release. The exchange, which has already started working with about eight likely clients, will operate as a “request for quote” electronic trading platform with market makers receiving every request, according to the release.

The over-the-counter derivatives market is large, with more than $600 trillion in notional amounts outstanding at the end of last year and $21.6 trillion in gross market value, according to the Bank for International Settlements.

Interest rate swaps make up the biggest portion of the market, Mr. Brady noted. He declined to predict what percentage of the market the new exchange might attract.

Don Wilson, DRW’s CEO, said he expects the new contracts to appeal to the market largely because they will be more easily customized for a particular firm’s needs than current alternatives. The Eris futures contracts, each of which has a face value of $1 million, can be tailored with any coupon rate or any maturity, according to the release.

“People have the ability to match the cash flows that they need to hedge with a fairly customized product,” Mr. Wilson said on the conference call.

Prior to taking the post, Mr. Brady was a managing partner at Chicago-based Third Stone Partners LLC, which is also an investor in Eris. At CME, which he left last year, Mr. Brady had been the global head of business development. He joined CME in 2004 after it bought a company he founded called Liquidity Direct Technology LLC.

While Mr. Brady acknowledged on the call that it’s “tough to know” how the new idea will play out, he expects significant volume to migrate to the exchange.

“Our assumption is that, shortly, a wide group of (firms) will be online,” Mr. Brady says.