Derivatives clearing is a market in which fragmentation results in increased costs. The ability to cross-margin between different instruments and exposures can significantly reduce margin costs and increase operational efficiency.
Matthias Graulich, Eurex Clearing
Historically, liquidity in swaps and listed futures clearing in euro-denominated products has been split across Europe with OTC swaps and short-term interest rate listed (STIR) derivatives being cleared and traded in different pools in the UK and longer-term interest rate derivatives traded and cleared at Eurex. This has resulted in inefficiency across the market and higher costs for both the buy- and the sell-side.
This inefficient market structure is now changing, however, as firms take advantage of initiatives at Eurex to offer trading and clearing in all products across the euro yield curve. Over the past 12 months, Eurex has seen continued growth in OTC clearing volumes in euro-denominated swaps as well as STIR products to build its proposition around the “home of the euro yield curve”.
These initiatives will likely gather further momentum with the introduction of Emir 3.0. Emir 3.0 enhances the existing regulatory framework for the EU’s clearing ecosystem with the intention to increase the resilience of EU clearing and reduce the reliance on non-EU CCPs for the clearing of euro-denominated, systemically relevant products.
Emir 3.0 will introduce the so-called “active account requirement”. While the final legislation still needs to be officially ratified by the legislators, it is clear that EU based firms across the buy- and sell-side that trade in euro and zloty OTC derivatives and STIR derivatives, such as Euribor futures, will need to have an active clearing account with an EU CCP. This is likely to become effective in Q1 2025.
Many firms have already opened an account and moved all or some of their relevant portfolio over to an EU CCP. In context of Emir 3.0, the European Commission found that 60% of the firms impacted by the active account requirement are already onboarded with an EU CCP.
For most firms, the transition to a European clearinghouse will bring significant benefits regardless of any regulatory mandate.
Eurex has invested to be able to offer significant benefits to firms that trade and clear their euro-denominated instruments across the entire interest rate curve at Eurex. The market infrastructure has been working with customers across the market to develop partnership and liquidity provider programs in order to facilitate the switch to clearing in the EU. As part of this investment, in 2023 Eurex launched €STR and Euribor listed futures and options to complement the product suite under the “home of the euro yield curve” strategy. These products offer end-clients a very competitive liquidity profile compared with the incumbent markets in the UK.
“Firms can take advantage of the portfolio margin effects along the euro yield curve across products including OTC interest rate swaps, listed European government bond futures and now STIR derivatives referencing Euribor and €STR rates,” said Matthias Graulich, chief strategy officer and Member of the Board at Eurex Clearing. “This brings cross-margin benefits, reducing risk and consequently lowering margin requirements as a result.”
For example, firms trading invoice spreads – the spread between fixed income futures and swaps – can save up to 70% of the margin that would be required clearing them in two separate pools. TED spreads traded between the Schatz and the Euribor strip bring similar margin reductions.
“In addition, the integration of the derivatives offering with cleared euro repo markets offers further operational and risk management benefits – funding derivatives cash variation margin via cleared repos or ensuring an efficient delivery of the bond into the future at expiring via a GC pooling repo basket,” added Graulich. “Over the next 24 months Eurex plans to further integrate the cleared repo business into its market leading Prisma methodology to offer ultimately portfolio margin efficiencies across repos and derivatives.
“Furthermore, the efficient use of collateral has become more important again with the significant rise in interest rates in the last 18 months. Eurex Clearing with its full banking license offers a broad spectrum of eligible securities collateral to minimise overall funding costs.
“We are generally seeing great support from major market participants to build alternative liquidity pools for euro-denominated interest rate swaps and Euribor futures within the European Union. More and more clients are onboarding and actively using Eurex across products to take advantage of the proposition Eurex can deliver.”
Eurex statistics
OTC IRD
- Ca 20% market share with over EUR 33 trillion in outstanding notional.
- More than EUR 35 billion OTC IRD margin under management.
- More than 650 onboarded clearing members and clients with a 30% activation rate.
- Same bid-offer spreads in the dealer-to-client segment compared to LCH cleared swaps.
STIR derivatives
- 15 non-bank liquidity providers and 20 major dealer banks committed to partner with Eurex supporting the effort to build an alternative liquidity pool in the EU.
- Market leader in €STR futures with more than 3.6 million traded contracts since launch in January 2023 as of 16 February 2024 and a market share of more than 50% built-up from January 2023 till end of January 2024.
- Re-launched Euribor futures in November 2023 with more than 4.9 million traded contracts as of 16 February 2024 and a ca. 5% market share built-up from November 2023 till end of January 2024.
- Excellent liquidity on- and off-book in both products.
“We are pleased with the progress to date, our strategy is one of constant innovation to deliver value to clients in areas such as the further integration of futures and repo,” said Graulich. “We are continuously expanding our proposition around the ‘home of the euro yield curve’ to deliver better efficiencies to our clients who often use euro-denominated products in a bundle.”
