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Euro clearing in Frankfurt – an update

Release date: 16 May 2019 | Eurex Clearing, Eurex Exchange, Eurex Group

Euro clearing in Frankfurt – an update

By Eurex Clearing Board Member Matthias Graulich
Matthias Graulich, Member of the Executive Board, Eurex ClearingZoom

Matthias Graulich, Member of the Eurex Clearing
Executive Board

A lot has happened since my last post. To put the events in a nutshell: Clients have gained substantial confidence in the quality of euro clearing in Frankfurt. This is demonstrated by increasing volumes across all tenors, a market share of more than 14 percent in notional outstanding of EUR denominated OTC interest rate derivatives (IRD), and a growing demand on the buy side.

Let’s have a look at the facts.

We have made strong gains both in the short-term business with forward rate agreements (FRAs) as well as in long-term swaps (IRS). Notional outstanding in Euro FRAs continues to increase and market share lately rose to over 40% percent in April. Euro IRS volume is also growing steadily and market share measured in notional outstanding rose to above 7 percent in April.

In addition, we have made significant progress in onboarding new buy-side clients.

In total, more than 220 end clients are now connected to our OTC IRD offering – of these, 90 customers in 2019 alone. And a significant pipeline of insurance companies, pension funds or asset managers are currently in the midst of the onboarding and readiness process. Moreover, in the last six months the number of customers getting active in the OTC interest rate derivatives (IRD) business has increased by 50 percent.
 

And as you can see in the adjacent chart, client demand remains fairly balanced. Cumulated across all tenors the balance fluctuates around the optimal value of 50 percent i.e. full balance in demand for payer and receiver swaps. So again, there is no sign of a solely directional flow at Eurex.

Remember, when I wrote in November about execution costs at Eurex Clearing? We had just observed a steep increase in the basis for euro swaps between LCH and Eurex Clearing. I was firmly convinced that there was no fundamental reason for this development - today you can see in the chart below that this was indeed the case – the basis decreased again. Does this mean it will stay there? Long term I’m convinced it will. Can there be temporary fluctuations? Yes, of course – offering a chance for those benefitting from temporary “mis-pricings”.

But the more important point: How did the offered spreads and sizes develop? Looking at Tradeweb or Bloomberg screens, over 20 firms are actively quoting Eurex swap prices with pretty much the same spread and size as for LCH.

To sum up: Key to growing an alternative liquidity pool is the efficiency of price formation. This is good news for all Category 3 firms which will be subject to the clearing obligation from June 2019: 

In view of the ongoing regulatory uncertainties, Eurex Clearing offers a liquid alternative to clear EUR-denominated IRS – same spread, lowest funding cost and EU-based. Find out more about the funding costs in my next blog.