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Randolf Roth and Matthias Graulich on our connection to Tradeweb

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

Randolf Roth and Matthias Graulich on our connection to Tradeweb

A major milestone for the seamless processing of spread trading

Eurex, Europe’s largest derivatives exchange, and Tradeweb, a world leader in building and operating electronic over-the-counter affirmation platforms, have built a direct connection to fully automate basis trading, i.e. the combined trading of listed and over the counter derivatives. Randolf Roth and Matthias Graulich discuss the new solution.

Randolf, Eurex teams up with Tradeweb. What is the story behind this?


Randolf Roth, Member of the Eurex Executive Board

Randolf: Well, the story is pretty simple and straightforward. Market participants frequently rely on a combination of swaps and futures to trade the yield curve. It is a common practice in the voice and electronically brokered dealer markets.

Therefore, Eurex and TradeWeb sat down and discussed how to integrate the so far disconnected processing chains for the future and the swap leg of such trades. We found a solution that enables market participants to trade and clear both the listed and the OTC leg in one go.

Matthias: From the clearing perspective, these efficiencies are exciting. Beyond processing efficiencies and direct access to the futures liquidity pool, the solution offers unique capital and margin efficiencies when having both the futures and the swap leg cleared with Eurex Clearing; clearing the opposing legs of an asset swap or basis trade under a common portfolio margining framework.

Eurex and TradeWeb are the first to offer the integration of so far disconnected processing chains for the ETD and OTC leg of such invoice and basis trades.

Matthias Graulich, Member of the Executive Board, Eurex ClearingZoom

Matthias Graulich, Member of the Eurex Clearing
Executive Board

Matthias: Indeed. Until now, basis trading could be arranged on Tradeweb. However, the clearing of the swaps leg and the execution of the futures leg had to be manually processed by the involved counterparties. This resulted in two separate workflows for swaps and futures. The new set-up allows a direct submission of the information about the futures leg into our trading system. Therefore, involved counterparties just need to approve this information in Eurex’ trading system to execute the futures leg. This process improvement further strengthens operational efficiencies and reduces risk as well as errors.

Randolf: Look at it from this perspective: Spread trading minimizes market and execution risk when trading the yield curve with swaps versus futures and bonds versus futures combinations. So it is only consequent, to also reduce operational risk on the market infrastructure side. With the regulatory and structural changes in the market place, there is now a huge market potential and buy side demand for more efficient and transparent electronic spread trading.

How will the new process work in detail?

Spread trading is a key hedging strategy for financial institutions in which futures contracts are used to hedge swap exposures. Swaps vs. futures, also referred to as an “invoice spread”, is a simultaneous purchase/sale of a futures contract against a spot or forward starting swap contract. The package is traded as a spread between the swap rate and the implied forward yield of the cheapest to deliver (CTD) bond. The notional of the swap and the number of lots of the future contract are set as to make the overall package delta neutral.

Matthias: The futures leg will be automatically booked with the exchange into the unmatched liquidity and open interest pool of our interest rate benchmark futures. Thereby, it will be available for cross margining. This is a major milestone for the seamless processing of spread trading.

Randolf: This shows that the new set-up increases efficiency by leveraging our resilient trading infrastructure and straight-through processing into clearing, thus further bringing together OTC and exchange trading.