Building out Eurex’s home of the euro yield curve ambition

Market participants are at the centre of a plan by Eurex to build an alternative liquidity pool for short-term interest rate (STIR) derivatives in Europe

If you were to pick the key characteristics market participants look for in a superlative trading platform, three would probably stand out: liquidity, choice and margin efficiency.

While they are of timeless value, they are especially relevant now as traders, hedgers and risk managers prepare for what is coming in light of recent key market and regulatory developments in Europe and a higher interest rate regime.

Ongoing regulatory moves related to the European Commission’s (EC’s) efforts to strengthen the European Union’s financial market infrastructure to manage systemic risks and increase strategic autonomy are a big focus in industry conversations and in the press.

Market participants have also needed to navigate volatility caused by the collapse in the US of Silicon Valley Bank, closely followed by that of Credit Suisse and its subsequent absorption by rival UBS. 

And, perhaps most significantly, interest rate expectations have pivoted sharply to the upside. This, coupled with greater uncertainty in the geopolitical landscape, is ushering in a new era in which managing STIR risk becomes paramount. 

These developments further increase the relevance of Eurex’s efforts to build out a compelling solution for market participants that aims – by creating choice, fostering liquidity and offering significant capital efficiencies – to create an EU-based liquidity pool for euro short-term interest rate (€STR) derivatives by offering choice, significant capital and margin efficiencies, cross-product efficiency and by fostering liquidity. 

Specifically, Eurex is establishing a viable alternative for trading and clearing Euribor futures and options within the EU. Eurex aims to build out its position as the home of the euro yield curve with an ever-growing range of euro-denominated rates derivatives.
 

Collaboration and partnership are key to successful initiatives

Eurex’s effort is focused on expanding its existing Partnership Program, a revenue-sharing and governance model launched with major market participants in 2018, starting with over-the-counter (OTC) interest rate derivatives and subsequently expanded by including Eurex’s repo business in 2019. 

In the fourth quarter of 2023, the Partnership Program – which combines revenue-sharing for the 10 best-performing and most supportive partners with participation in the Eurex governance – will be extended to include STIR derivatives. 

Furthermore, the Partnership Program will include three-month futures referencing €STR, which Eurex launched in January. The establishment of futures referencing €STR was not only an important milestone in establishing €STR as the new benchmark risk-free rate, but also an early sign of Eurex’s commitment to its ambition in euro‑denominated rates derivatives. 

Moreover, by expanding the Partnership Program into STIR derivatives, Eurex will strengthen its cleared OTC interest rate derivatives suite. The suite is already the second-largest liquidity pool worldwide for euro interest rate swaps, with an outstanding notional of more than €30 trillion – representing a market share of around 20%.

This will enable global clients to benefit from a comprehensive fixed income product offering, including Eurex’s leading European government bond derivatives, and funding and financing (repo) segment, as well as the clearing of the OTC interest rate swaps business. So far, ABN AMRO Bank, Bank of America, Barclays, BNP Paribas, Citigroup, Commerzbank, DekaBank, Deutsche Bank, HSBC, Goldman Sachs, JP Morgan, LBBW, Morgan Stanley, Nomura, Nordea Bank, RSJ Securities, Societe Generale and UniCredit have signed up and joined the programme – known as the STIR Partnership Program.
 

Efficiency through portfolio and cross-product margin offsets and cheaper funding options

A key element of the offering is the achievement of capital and margin efficiency through cross-product portfolio margining.

The changed interest rate environment is increasing funding costs and is triggering an increased focus from major market participants on managing such costs. 

Funding costs can be efficiently managed in two dimensions: 

1. Reducing the level of initial margin by bringing offsetting positions across different products into the same portfolio at the same central counterparty (CCP).

2. Leveraging cheaper funding options, such as using corporate bonds or equities rather than more expensive government bonds, cash or reusing received securities collateral for margin funding purposes.  

Eurex’s solutions are targeted at both dimensions and are unique in that regard, particularly when offsetting opportunities around the euro yield curve.

By including the STIR offering in Eurex’s cross-margining solution and combining it with the fixed income derivatives franchise, Eurex will be able to deliver unique, unparalleled initial margin savings. For example, Eurex includes three-month €STR futures in the same liquidation group as euro OTC swaps and euro government bond futures cleared at Eurex Clearing, thus offering margin reduction opportunities with its industry-leading Prisma margin methodology. 

Additionally, market participants can benefit from the second dimension, in effect, cheaper funding options, for their STIR derivatives activities. 

The extension of the Partnership Program is the latest step in Eurex’s efforts to provide the market with greater choice, higher efficiencies and bringing more systemically relevant business into the EU

Matthias Graulich, Eurex Clearing

Supporting the EU systemic stability and strategic autonomy agenda 

It is no coincidence that the regulatory backdrop in the EU, where there is an overarching policy objective of enhancing systemic stability and increasing strategic autonomy, comes into play.

In December 2022, the EC announced a plan to reduce reliance on CCPs from outside of the EU under a proposal to reform the European Market Infrastructure Regulation. This included a requirement that all market participants subject to a clearing obligation hold ‘active’ accounts at EU CCPs for clearing products identified by the European Securities and Markets Authority (Esma) as of substantial systemic importance for financial stability in the EU.

Esma has identified euro STIR derivatives clearing as being of systemic importance, in addition to euro interest rate swaps and euro credit default swaps.

With its STIR Partnership Program, Eurex aligns with – and supports – the EU‘s systemic risk management agenda, as well as its policy objective of achieving what the EC calls “open strategic autonomy”. This includes avoiding “excessive concentration and exposure of clearing at third-country CCPs”.

Market-driven solutions for greater efficiency and systemic stability

As Matthias Graulich, member of the executive board at Eurex Clearing, says: “The extension of the Partnership Program is the latest step in Eurex’s efforts to provide the market with greater choice, higher efficiencies and bringing more systemically relevant business into the EU.”

This helps customers to diversify risk across CCPs and benefit from comprehensive cross-product margin efficiencies, provide the lowest funding costs via the broadest range of securities collateral and offer the most attractive terms for euro cash collateral.

Choice and competition are beneficial to the marketplace, driving innovation and efficiency. Eurex believes the new STIR Partnership Program aligns industry and regulatory interests by pushing for market-driven solutions by addressing concerns from both stakeholder groups. 

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