Börse Stuttgart has acquired Citi's automated trading system (Cats) for bilateral trades, which includes OTC transactions in structured products, in a move that will change structured products trading in the German market as well as creating a wider platform for the exchange's European rollout.
Citi and Börse Stuttgart have signed a binding agreement to launch a new company that will own the bank's Cats platform. The business will be managed by Börse Stuttgart's head of marketing/sales, Rupertus Rothenhäuser, and Citi's head of automated trading services (Cats), Chuffy Hunter.
Rothenhäuser told SRP that the Cats acquisition is in line with the exchange's expansion plans to create a pan-European market for structured products, for issuers a central hub is preferable to repeating the same product with a different ISIN code listed in each European country.
"Connectivity is going to be a key driver going forward and the Cats' platform is already linked to multiple significant parties including brokers in France and the Netherlands in addition to Germany," he said. "With Cats, Börse Stuttgart can become the partner of choice for issuers and providers trading securitised derivatives across the EU."
Hunter who has been the driving force of the Cats platform at Citi since 2000 will be joining the new firm, along with the Cats staff. He told SRP that 95% of the OTC bilateral trading transactions within Citi's Cats are structured product related and that the platform will continue with its current set up.
"Cats will remain an independent business within Börse Stuttgart and will continue providing both its core platform and its specific client-tailored solutions for individual partners," he said.
Regulatory pressure
The bid by Börse Stuttgart to buy Cats was set off by the new regulatory requirements for increased transparency in relation to structured products trading within the European Union (EU), which would have forced Citi to make significant changes to the platform's business model.
As a result of the regulator's efforts to mitigate counterparty risk through the use of central counterparty clearing (CCPs) and improve the overall risk profile of the OTC markets, a number of European exchanges lobbied hard for increased supervision on off-exchange trading as issuers moved to the OTC space to take advantage of cheaper execution of trades.
Despite the pressure from structured products exchanges in Europe, Mifid II has established that OTC platforms would not be organised trading facilities (OTFs), and that structured products can continue to be traded on an OTC basis although under tougher rules.
SRP understands that the location of the new firm which has not been given a name yet is still being discussed due to considerations around the financial transaction tax (FTT), which has caused controversy between the UK and Europe.
Related stories:
· Deutsche Börse re-brands SP platform, overhauls trading venue
· Swiss Scoach launches XBTR OTC platform
· Börse Stuttgart: We must do more to highlight the advantages of SPs
· Citi's CATS get EMCF clearance
· EMCF adds CCP services for OTC transactions on Citi's Cats platform