Eurex Preps for Margin Rules

Shanny Basar

Eurex, Deutsche Börse’s derivatives exchange, is launching total return futures as new regulations in Europe are likely to shift swap trading from the over-the-counter market.

Mehtap Dinc, global head of derivatives product development at Eurex, said in a statement: “The product is launched ahead of the bilateral margin rules on non-cleared swaps which are likely to be introduced in Europe in early 2017.

In September regulations requiring the exchange of initial margins for uncleared swaps between the largest swap dealers, with gross exposures of more than $3 trillion, came into force in the US, Japan and Canada affecting approximately 20 global firms. The rules did not cover transactions between two European institutions but European firms have been required to post margin for uncleared swaps with US, Canadian and Japanese institutions.

Dinc continued that Eurex’s total return futures will offer similar returns to total return swaps so market participants are expected to cut back on their OTC swap positions and switch to futures.

The total return futures will initially be launched on the Euro Stoxx 50 index on December 2. Eurex said the intention is to establish a template that can be used for other indices, subject to customer demand.

The exchange will list futures with  21 quarterly expiries to ensure that the exchange always has five years of contracts. The German exchange anticipates that the key driver for using total return futures will be from sellside banks impacted by the new non-cleared bilateral margin rules which affect new trades from 2017.

The total return futures positions be netted with other contracts of same expiry at Eurex allowing more efficient use of capital. Initial margin offsets will be calculated within Prisma, Eurex’s risk system, alongside all other equity futures and options, including dividend derivatives according to the exchange. Trades executed on Deutsche Börse have to be cleared on that exchange, so Eurex Clearing will acts as a central counterparty, mitigating counterparty risks.

Emmanuel Dray, head of EQD institutional sales &  linear trading at BNP Paribas, said in a statement: “This is exactly the right time to launch total return futures. They allow the market to continue trading in the new regulatory environment with stronger capital requirements by replicating OTC products whilst introducing the liquidity and position netting available in a standardised futures.”

The change in trading since September when the initial margin rules for uncleared swaps came into force outside Europe has been demonstrated by a market for cleared US dollar inflation swaps has sprung up.

Tod Skarecky at analytics and research firm Clarus Financial Technology, said in a blog that there was no evidence of panic September 1 as there did not seem to be any halt or reduction in swaps trading through the new mandate. Skarecky added: “Clearing of inflation swaps seems to be the success story coming from uncleared margin rules.”

Euroclear, the central securities depository, said in a note:  “The new environment for non-cleared OTC derivatives transactions may lead to a greater use of common standards and utility-type solutions to smooth collateral processes.”

For example, this month Sapient Global Markets, a technology provider and consultancy, implemented a collateral optimization and automation platform at Germany’s DZ Bank.

Michael Schneider, department head liquidity/collateral management at DZ BANK, said in a statement: “Due to the automation the system offers, we enhanced the workflows within our collateral management setup. In addition we are able to identify optimal choices thereby taking into account not only the specific funding cost of a given collateral but also other factors like negative interest rates and transaction costs affecting these choices.”

Euroclear said in a note: “In Europe, the deadline for the start of buyside compliance with the new non-cleared rules has been pushed back several times.”

Timothy Massad, chairman of the US CFTC, said in a speech at the OTC Derivatives Summit North America in September: “We continue to be mindful of the fact that, on March 1 of next year, a much broader scope of firms will be subject to variation margin requirements. I am hopeful that the European rules will be in place by then. We will keep an eye on this date and we will explore alternative actions that we could take to address any further consequences in the event the delay is not minimized.”

More on swap regulation:

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