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Euro clearing in Frankfurt? Costs are no longer a hurdle.

Release date: 18 Sep 2018 | Eurex Exchange, Eurex Clearing

Euro clearing in Frankfurt? Costs are no longer a hurdle.

By Eurex Clearing board member Matthias Graulich

People keep asking me how liquidity is developing in our OTC Interest Rate Swaps clearing segment. They are wondering whether they will face higher costs when moving their IRS business to Eurex Clearing.

Let me assure you, things have changed: yes, bid/offer spreads were higher for Eurex cleared Euro swaps for the last couple of years, but with the start of the Partnership Program we have taken this important hurdle in the meantime. There is no evidence anymore for the concern that a fragmentation of the existing liquidity pool would lead to significant cost increases in particular for EU27 buy side firms. For all relevant tenors, 19 banks supply quotes on request via Tradeweb and/or Bloomberg and 9 banks are currently actively streaming live prices on the platforms largely at the same bid/offer spread and size as for LCH cleared Euro swaps. Just take a look at the table. In all fields highlighted in green the spreads are at least the same and in some cases they are even narrower.

And the basis cited by many as a cost argument has completely disappeared in the maturity range of up to 10 years. This means that the prices at Eurex and LCH are de facto the same. For longer maturities, the basis is now significantly reduced to approx. 0.5 basis points, as you can see in the graph. By the way, the basis does not necessarily have to be unfavorable. Fix receiver swap clients, for example, still benefit from receiving basis in the 30 year tenor, which should be very attractive for pension funds.

The excellent execution price quality provides end clients, such as smaller banks, investment funds, insurance firms and pension funds, for the first time with a real alternative for clearing their Euro swap business. This allows them to now tap unique benefits Eurex is delivering:

  • Margin benefits from pooling their Euro interest rate exposures across listed and OTC derivatives
  • Funding cost benefits from the broadest eligible collateral range globally
  • Asset protection and cost benefits leveraging Eurex Clearing‘s innovative clearing models such as ISA Direct

All this shows us the potential of market-driven solutions in times of political change. The best proof is our increase in average daily cleared volume in Interest Rate Derivatives from EUR 3.6 billion last August to EUR 64 billion in August 2018 leading to a market share of roughly 10 percent1).

Can’t wait to see how the market will continue to change over the next couple of months!

1) Based on cleared volume in Euro denominated OTC Interest Rate Derivatives published on the websites of Eurex Clearing, LCH and CME (as of 30 August 2018)