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Nasdaq Enters Currency Dog Fight in Europe Clearing Non-Deliverable Forwards
Nasdaq OMX ( NDAQ ) is planning to start clearing non-deliverable forward (NDF) currency trades in Europe. NDFs facilitate trading in currencies such as the Chinese yuan and Indian rupee that are not free to trade. NDFs are classified as swap trades under the Dodd-Frank Act rather than plain vanilla derivative trades which make them subject to the new clearing rules. The move will put Nasdaq in competition with LCH.Clearnet and CME Group ( CME ) who have already finalized their offerings for NDF clearing. Nasdaq OMX is the second largest stock exchange operator in the world behind NYSE Euronext ( NYX ).
The regulations governing European market infrastructure are currently in discussion in the European Parliament and are expected to be similar to the Dodd-Frank Act which categories these instruments as swaps and require them to go through a central clearing house from the end of 2012. Nasdaq has applied for UK Financial Services Authority recognition for its existing European clearing house in Stockholm which would allow London based financial institutions to become direct clearing members.
New clearing rules have presented big business opportunity for exchanges with clearing houses. These exchanges can offer clearing for exchange traded products along with privately traded derivatives contracts which would be a cost effective solution for many banks that clear both instruments together.
We have a price estimate of $25.84 on Nasdaq OMX's stock, about the same as the current market price.