In order to assist market participants and regulators alike to cope with the unprecedented uncertainty around Brexit, Eurex Clearing, one of the world’s leading central counterparties and part of Deutsche Börse Group, has developed a partnership program. The program is designed to further accelerate the development of a liquid, EU27-based alternative for the clearing of OTC interest rate derivatives denominated in Euro. The program builds on our success in clearing a broad range of products across multiple asset classes.
Eurex Clearing has designed the program in cooperation with major participants in the interest rate swap market, including dealers, end-clients and execution venues. The performance based program aims to build a balanced ecosystem where responsibilities and benefits are fully aligned among all participants in terms of economics and governance.
Broad market support to address regulatory concerns
European regulators are currently discussing how to enhance the EU’s ability to safeguard its financial stability and manage potential systemic risks that may result from financial products denominated in Euro being cleared outside its jurisdiction. While Eurex Clearing fully agrees with the desire of EU regulators that such products must be cleared within the EU going forward, we believe that a market-led solution to develop an EU27-based alternative for OTC IRS clearing is preferable over any forced re-location.
The partnership program has gained broad market support. Since its launch in October 2017, the program has been joined by 27 market participants from the U.S., the U.K., Asia and Continental Europe. It is a true partnership approach: the 10 best performing clients get a significant share of the economics from our IRS clearing service. In addition, these clients will be included in the governance and committee structure of Eurex Clearing.
We note a strong increase in demand for our OTC clearing services. Since the beginning of 2018, Eurex Clearing’s OTC interest rate derivatives saw record activity under the new partnership program. The average daily volume cleared until end of April in this segment increased to almost EUR 50 billion—a market share of roughly 5% in the global Euro denominated interest rate swaps market—from just 5 billion in 2017. The total notional outstanding at end of April reached over EUR 5 trillion compared to roughly EUR 1 trillion in April 2017.
Excellent execution price quality for the buy-side
The partnership program also has led to a level playing field in terms of execution prices. We observe an increasing number of banks now quoting the same bid-offer spread for swaps cleared at Eurex Clearing and LCH, easing any market concerns around price quality and overall costs for the industry. This provides end clients such as smaller banks, investment funds, insurance firms and pension funds with a real alternative for clearing their Euro swap business as they can benefit from pooling Euro interest rate exposures across listed and OTC derivatives, benefit from lower funding costs, or leverage innovative clearing models like ISA Direct. Eurex Clearing cooperates with major execution platforms for OTC traded interest rate swaps to enhance price transparency, price discovery and liquidity. BGC Partners, Bloomberg, TP ICAP's i-Swap, Tradeweb and Tradition’s Trad-X are “Approved Platforms” as part of the Eurex Clearing partnership program framework.
By establishing a competitive, extremely efficient market-led initiative, clients and the broader market place can benefit through greater choice and competition, improved price transparency and quality as well as greater robustness of financial markets.