Clearing and Settlement of Derivatives

The Philadelphia Stock Exchange received SEC approval in July

to launch trading on its XL platform and has scheduled 10 classes

for conversion in August. Pacific Exchange has begun rolling out

its PCX Plus system, and the American Stock Exchange is devel-

oping its own electronic trading system, ANTE.

No figures are available on the overall ratio of electronic to open

outcry trading, but the trend is clear: an increasing amount of

orders are being matched electronically as each exchange moves

farther along the curve.

The all-electronic ISE has grown steadily since its start in May

2000 and continues to gain market share at the expense of the

other exchanges. It pulled past the CBOE earlier this year and

now ranks as the largest exchange in the world for individual

equity options, with 176.4 million contracts traded in the first

half of 2004.

Even so, ISE still has only a third of the total volume in the U.S.

market. In contrast to the experience of futures exchanges, com-

petition among the U.S. options exchanges has not resulted in a

winner-take-all outcome. As of June, Amex had around 19 per cent

of the market, down from 23 per cent in December 2002, and

Pacific Exchange was holding onto 8 per cent of the market, down

from 11 per cent in December 2002. Their market shares are

declining, but they remain competitive.

Last but not least, there is a new exchange in the marketplace.

The Boston Options Exchange (BOX), a joint venture of the Boston

Stock Exchange, Interactive Brokers and the Montréal Exchange,

began trading in February and has traded 6.8 million contracts in

its first six months. Compared to the other exchanges, it’s still

tiny, with less than 2 per cent of the overall market at the end

of June, but BOX says its market share in individual names has

been as high as 10 per cent.

Source: FIA.

12 Clearing and settlement of derivatives

Summary

The derivatives industry continues to be innovative and to grow. New

products, new exchanges, growing use of OTC products all of this is

creating a massive challenge to the firms and infrastructure that

supports the industry, and the growth is not confined to the United

States and European markets.

In the first six months of 2004 the Asia-Pacific region, which

includes Australia and New Zealand, took 37.4 per cent of the

total global volume in futures and options, 5 per cent ahead of

North America (32.3 per cent) and over 10 per cent ahead of Europe

(24.6 per cent).

The challenges that operations teams face is also diversified with

technology, product awareness and adequate controls to manage

operational risk as key issues.

Development of futures, options and OTC derivatives 13

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