Eurex Clearing is starting to gain traction in its efforts to attract more business to its clearing service for interest rate swaps. Clearing volumes in the first two months of the year were running at about three times the level of a year ago, reflecting the continued onboarding of new clients and several enhancements to the clearing service.
Although Eurex remains well behind LCH in terms of overall volume in swaps clearing, the German clearinghouse is continuing to build out the service, adding more trading venue connectivity, introducing certain functionalities for asset managers, and extending the service to U.S. customers. As of early March, 64 clearing members and 178 customers had signed up for IRS clearing, and Eurex officials believe they can offer a viable alternative to LCH for euro-denominated interest rate swaps.
In February, the clearinghouse processed approximately €124 billion in notional outstanding of interest rate swaps per day, more than three times the €36 billion cleared per day in February 2018. According to Eurex Clearing, its share of the euro-denominated swap market was 6.9% in February.
One driver for the higher level of activity in 2019 has been the clearinghouse’s partnership program, which creates incentives for clearing members to bring business to Eurex Clearing. The program currently has 33 participants from 10 countries, including five banks from the U.S. as well as one nonbank swap dealer, Citadel Securities Europe. The 10 most active participants are rewarded with a share of the revenues from swap clearing and representation in the clearinghouse’s governance.
Looking forward, Eurex Clearing expects additional volume coming from the U.S.; In February, the clearinghouse cleared its first interest rate swap for a U.S. customer, with Citigroup acting as the clearing firm, and the clearinghouse said that at least eight funds had signed up to use the service.
This geographical expansion was made possible by the introduction of a customer protection framework known as “legally segregated operationally commingled” or LSOC that is used for swap clearing in the U.S. In December, Eurex Clearing received regulatory approval from the U.S. Commodity Futures Trading Commission to offer this type of customer account. In effect, this means Eurex Clearing can offer its swap clearing service directly to U.S. clients through their futures commission merchants.
Mariam Rafi, North American head of OTC clearing at Citi, commented that Citi worked with Eurex to launch the LSOC model and said it would give U.S. customers an additional option for clearing their euro-denominated interest rate swaps. “Providing this solution responds to our clients’ desire to access new liquidity venues for euro interest rates,” Rafi said.
The clearinghouse is also working to enhance the operational aspects of its service. In February, Eurex announced that it had established links to the U.S. and U.K. swap trading venues operated by Bloomberg. The move, which allows trades executed on those platforms to be submitted directly to the clearinghouse, followed a similar announcement with Tradeweb in November. Bloomberg and Tradeweb are heavily used by asset managers and other buyside customers to execute their interest rate swaps, and connecting to these venues will streamline the workflow for these clients.
“Direct connectivity to Bloomberg is another important step in expanding our OTC clearing services to sell and buy-side clients in the U.S. and Europe,” Danny Chart, head of fixed income business development at Eurex Clearing, said when the Bloomberg announcement was made.
Another operational enhancement is slated for introduction later in 2019. The clearinghouse is preparing to allow asset managers to submit “bunched orders” for clearing. This functionality is designed for asset managers that are executing trades on behalf of multiple customers. Once cleared, the resulting positions can be allocated into different accounts. The goal is to make it easier for asset managers and clearing firms to process these orders efficiently and streamline their workflows.
