How About an 'Exchanges' ETF?

Martin Raab is publisher of ETF Radar Magazine, where this article originally appeared.

Many stock exchanges around the globe are ready and able to start acting as a central clearing counterparty for the $27 trillion credit default swaps (CDS) market. This new, rising business could boost the exchanges' profits.

Also, the current valuation levels of listed exchanges are attractive. What would be a more logical next step than an ETF tracking select exchanges?

The events in the OTC credit derivatives market last year convinced regulators in the U.S. and Europe of the need to establish a central clearing counterparty (CCP) for the CDS market.

Most of the toxic assets plaguing financial institutions were purchased in the non-regulated OTC markets. The benefits of a CCP model are well understood: no counterparty risk because of margin requirements, fast and reliable clearing processes, and of course, transparency.

Top 10 Global Exchanges by Turnover Source: WFE/ETF-Radar, as of July 2009

Little wonder that clearinghouses and exchanges have responded to the call with great enthusiasm. They see the clearing business as a first step toward gaining a foothold in a business that has so far remained beyond their reach.

But there are clear signs that the competition for the share of this market will be hard and sometimes ruthless. A prominent example is Deutsche Borse, the top dog in Europe's exchanges landscape, which was overrun by its U.S. rival IntercontinentalExchange (ICE Quote).

The Atlanta-headquarted ICE has taken over the leadership in Europe's swaps-clearing business because of a profit-sharing agreement with more the 10 top-tier swaps-trading banks.

ICE had cleared around 1,500 swaps transactions with a notional value of 89 billion euro by the middle of August 2009. Its competitor, Deutsche Börse, has cleared just four swaps with a face amount of 90 million euro.