VPS Clearing operates the Norwegian clearing house for derivatives and securities lending and borrowing. In September 2006, VPS Clearing acquired NOS financial clearing business. Together, with clients and other central actors in the derivatives market, the combined services company aims to further develop the Norwegian derivatives market and increase demand for derivatives products.

Prior to merging with VPS, NOS partnered with OMX in 2005 to change out its legacy equity derivatives clearing system in favor of SECUR. On a broader scale, this also meant that Norwegian clearing of financial products would be implemented in the same SECUR instance as used by OMX and EDX (clearing of Finnish, Danish and Swedish financial derivatives). As such, all trading and clearing of Nordic financial derivatives would be fully integrated into one platform, with trading on CLICK and clearing on SECUR.

The wider benefits are clear

On the Nordic market, an integrated platform makes it substantially easier to launch new clearing products and clearing services. The other benefit is that the operational setup is less complex which helps to reduce the operational risk and cost of the total infrastructure.

Integrating trading and clearing of Nordic derivatives to one platform supports easier and smoother cross-border processes and mechanisms that can bring greater access and interoperability for all market participants. This is just the kind of thinking behind new EU directives for more openness and competition. While these directives currently focus on cash equity trading, the underlying intentions serve as a good example for derivatives trading.

Clearing derivatives can be tricky

On a purely operational level, SECUR provides the flexibility needed to cope with the complexity of derivatives markets.

Clearing for derivatives, in particular, can be quite exacting, where different rules apply to different products. The technology needs to enable complex calculations and risk valuation methods while minimizing administration with straight through processing. That is what SECUR is designed for.

OMX product manager Jörgen Brodersen is well-versed in the challenges of derivatives: “In terms of sheer administration, compare the trade of an equity stock to that of, say, an equity stock future. A trade of an equity stock results in an instruction telling someone to pay at a specific date (usually 3 days after the trade) and another instruction to the counterpart to deliver the stock at the same time. The trade is settled after that. With an equity stock future that has, for example, a duration of six months, the gain/loss is cash settled every day until expiration when the future ends up in the equity stock trade (with 3 days delivery). In addition, we have to handle margin and collaterals for the equity stock future position to minimize the risk for the clearing house.”

“In the case of VPS, OMX and EDX/LCH, the system is essentially handling the clearing of three clearing houses at once. These also have clearing links, which means that a participant from one country can trade with a participant from another and clear their trade through their own local clearing house,” Brodersen adds.

The pressure for systems that offer both flexibility and control is expected to continue to increase with rising derivatives volumes and a flow of new products. At the same time, rapid response is more important than ever to operate and grow the business.

Christian Sjöberg, CEO at VPS Clearing, sees time to market as key to VPS’s future: “We need to be able to accelerate product development and reduce our time to market with value added services. SECUR makes it easy for us to introduce new products quickly and tailor our services depending on the demand of the market.”

A clear road ahead

“While certainly a complicated project, the implementation of SECUR in VPS took less than 12 months and was launched on November 27th. Following OMX’s project methodology, our involvement and responsibilities have included the technical systems design, service solutions, delivery project, operational and support structure and the production launch,” says OMX Solution Team Manager and Project Owner Göran Almgren. “With the all clear on the launch, we will continue to provide operational support.”