Trad-X and Eurex Prep for Mandatory Clearing
Trad-X, the interest rate swap trading platform, and Deutsche Börse’s Eurex Clearing have launched a new central limit order book as mandatory clearing comes into force in Europe in June.
Trad-X launched the central limit order book for EurexOTC cleared products on 21 February. Under Emir, the central clearing regulation, certain interest rate swaps in the European Union will have to be cleared from June 21 and the frontloading requirement started this month.
The new central limit order book initially focuses on the most liquid Euro interest rate swap tenors for Bund, Bobl and Schatz government bonds. Continuous two-way streaming prices will be provided by a range of market participants including 15 of the largest global market participants.
Dan Marcus, chief executive of Trad-X, told Markets Media: “We have been offering swap trading in Euros since 2011 but until now there has only been client demand for one CCP for clearing interest rate swaps. The Emir mandatory clearing requirement may change this and hence us providing a transparent execution service for the trading of Eurex cleared interest rate swaps.”
Trad-X also provides a switch service between Eurex Clearing and the London Stock Exchange’s clearing business, LCH.Clearnet, so participants can efficiently and easily move positions from one CCP to another and optimise their margin exposure. Since the service launched Deutsche Börse and the London Stock Exchange have announced discussions about a possible merger.
“In the US Trad-X launched in 2013 as a mandatory cleared platform with only one CCP being LCH.Clearnet,” added Marcus. “Due to the emergence of CME Clearing in USD interest rate swaps, we provided a switch service to enable participants to transfer CCP risk positions between LCH and CME.”
In the US clearing of certain interest rate swaps became mandatory due to the Dodd-Frank regulatory reform act in 2013. Trad-X is part the US swap execution facility registered with the Commodity Futures Trading Commission by the Tradition SEF, part of the Swiss interdealer broker for financial and commodity related products.
Marcus said: “In Europe we are registered as a multilateral trading facility and we offer impartial access to direct members of relevant CCPs where we provide the trading service.”
Nearly 80% of European investors still prefer to trade interest rate derivatives over the telephone according to the recent Greenwich Associates 2015 European Fixed Income survey. with the traditional request-for-quote model a distant second. The consultancy said only 20% of notional volume was executed electronically last year, and less than 40% of investors use electronic trading tools.
“In Europe we are slowly seeing an increase in appetite to trade interest rate swaps electronically but this does not compare to Trad-X in the US, where the SEF execution mandate means all of our bids and offers are submitted to the Trad-X screen,” added Marcus. “Accordingly, virtually all of our SEF trades are executed electronically in some way, shape or form.”
Greenwich said that before the SEF trading mandates in the US in 2013, electronic trading of interest rate derivatives by US investors was below the current European adoption at 15% of volume, but has since increased to three-fifths of volume being traded electronically.
Philip Simons, global head of fixed income trading and clearing sales at Eurex, told Markets Media there is an increase in participants voluntarily clearing swaps ahead of the mandate. He added that in Swiss Francs, Eurex’s market share for clearing has steadily increased to 6% and reached 20% on certain days. The average daily volume of EurexOTC Clear has increased by over 60% since the start of this year.
Interest rate swap clearing volume are dominated by LCH.Clearnet, part of the CCP switch provided by Trad-X in Europe.
“Trad-X has a really good track record and we have similar views on how the swap markets will develop. It is beneficial for participants if we can help to promote an active and liquid basis across CCPs,” added Simons.
Eurex has 107 buyside firms on board for clearing and more than 150 in the process of joining. “The buyside has already started voluntarily clearing swaps, albeit quite slowly, but we expect that to steadily pick up in the next year,” said Simons.
He continued that a lot of clients see Eurex as their Eurozone CCP as the firm has access to the European Central Bank refinancing through GC spooling, which allows a large number of securities to be automatically reused as margin collateral.
“We are also the only CCP that allows exposure at default payment netting across cash equities, cash bonds, listed and OTC derivatives plus repo and securities lending under one legal agreement with a single margin payment,” added Simon.
Eurex also has a single segmented default fund which Simon said allows clients to use capital 40% more efficiently. He added that Eurex can offer cross-margining efficiencies of up to 70% on asset swaps with an average portfolio realising a capital saving of roughly 30%.
Simons added: “The new service is part of Eurex’s liquidity action plan which also includes a bulk multi member backloading service so firms can calculate potential margin requirements and capital savings from compression in advance.”
Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.
Temporary equivalence is set to expire on June 30 2022.
IRS trading volumes have fragmented without an equivalence agreement.
Phase 5 of the uncleared margin rules came into effect on 1 September.
Triparty repos can be executed across U.S. Treasury securities to central clearing.