Eurex Clearing OTC IRD momentum grows, with new participants and new currencies
In this article, Eurex Clearing’s Danny Chart, Global Product Lead for OTC Interest Rate Derivatives, and Milena Dimitrova, Regional Sales Manager, Sales EMEA, provide insight into how the OTC interest rate derivatives (IRD) markets have handled the introduction of the EMIR 3.0 active account requirement (AAR). Throughout the year, Eurex has seen positive momentum in its OTC IRD offering and here we describe how this is benefiting a range of market participants, as well as detailing further plans for expansion in areas such as new currencies.
Introduction
When EMIR 3.0’s AAR came into effect on 24 June, it was a landmark moment for the OTC IRD market. However, it was not a big bang event. A continental OTC IRD market was already well-established by this date, the result of a multiyear project to build robust market infrastructure, reliable liquidity and cost-efficient operations.
As the home of the euro yield curve, Eurex has played a central role in this development. Through our deep and long-lasting connections with the derivatives markets we have created a clearing platform that now hosts more than 2,200 unique clients (based on LEIs).
Technology and a keen understanding of market participants’ needs have been essential to driving this long and deliberate build. Modern functionality and seamless workflows underpin the firms’ execution of day-to-day clearing operations. We also offer significant trading efficiencies for participants that clear both Eurex Exchange Traded Derivatives and OTC IRD in the same account with us. Margin, netting and collateral efficiencies lie at the heart of the Eurex Clearing service and will continue to power its growth for many years to come.
While technology is one foundation of this market’s success, so are its participants. Through constant engagement with the market and understanding of its needs, we had established a fully-formed clearing ecosystem for the euro OTC IRD market well before the compliance rush for AAR began. All major clearing brokers are connected to Eurex Clearing, with both European and US clearing models available to participants. With market makers, interdealer brokers and trading platforms providing transparency on a strong Eurex Cleared liquidity picture, competitive prices, and integrated workflow on a consistent basis, market participants are increasingly empowered to make informed trading decisions and efficiently access deep pools of liquidity.
These building blocks have made Eurex’s role as a partner and innovator to the market a natural development. Through our well-established networks, we have conducted significant outreach and supported many participants through the transition to AAR.
About 650 of our clients joined this year and we have been working closely with them to ensure a smooth transition. We have also supported market participants with services such as our CCP Switch incentive program, which is still being offered with a 100% discount on regular OTC IRD booking fees for clearing members and clients.
Who has been driving growth?
While we have seen strong and sustained growth in the Eurex Clearing OTC IRD market for some years now, there has undeniably been an AAR boost to participation this year. This has not just come from firms pursuing compliance, but market participants attracted to the growing liquidity pool created by that regulatory push. Interest rate swap (IRS) volumes are up by 90% year-on-year, and overnight indexed swap (OIS) activity has shown similar gains. Notional outstanding has increased by a further 25% in IRS and 50% in OIS.
New participants have comprised both EU and non-EU firms, with significant growth in both. Year-on-year growth in IRS and OIS activity has been 100% from non-EU clients and 95% from EU clients.
Among these non-EU newcomers are hedge funds, which have been attracted to Eurex on the back of increasing swap liquidity and trading opportunities. Average daily volume generated by hedge funds has increased by about 140% year-on-year.
These market participants tend to be opportunistic, participating in liquidity pools where they can identify trading opportunities that represent real value. In the case of trading central counterparty (CCP) basis, that means healthy activity and good two-way flow. With that confidence, hedge funds can steadily harvest PnL as they deploy their basis strategies.
Many are also realising the benefits of cross-margining, when trading Exchange for Swap (EFS) and clearing both future and swap legs at Eurex Clearing.
Cross–margining
Historically, EFS have involved a Eurex future leg and a swap leg traded on a different venue. However, this has meant posting gross margin for both sides of the trade. With cross-margining efficiencies of up to 80% for some strategies that clear the swap leg at Eurex, more participants are adopting this behaviour. This can make a significant difference to the cost-structure of the finely-tuned basis trade.
Of course, the fundamental attraction of a CCP to hedge funds is liquidity, of which they form only part of the picture. It is therefore worth taking stock of how the pool has diversified at Eurex over the last few years.
European pension funds have been a significant source of activity at Eurex in recent years. One of the advantages for these participants is the ability to manage large, directional positions more efficiently. These positions are particularly vulnerable to margin add-ons, which can be substantial if concentrated at a single CCP.
As such, more are reacting to growing Eurex liquidity by spreading their exposures to include us and further benefiting from our broader value proposition, creating a virtuous circle.
Regional banks are long-term members of the Eurex liquidity pool, which is a natural home for those with purely euro-denominated exposure. These firms engage with Eurex as their sole CCP, through a range of hedging activities as they service their mortgage books. These market participants are very focused on margin and operational efficiencies.
Beyond euros
The increasing engagement we are seeing also shines a light on a new prong in our growth strategy. For market participants with euro-denominated books, the case for clearing at Eurex is simple. However, for those with multiple currency exposures, there is the opportunity to use more than one CCP to achieve cross-currency efficiencies.
As euro liquidity builds further, we also see client appetite to move other currencies into Eurex to achieve cross-currency offsets and other efficiencies. This is already happening to an extent, with clients holding Swiss franc, sterling and US dollar exposures at Eurex. We aim to support this growth further, in line with the development of our core euro offering.
Here our focus is to ensure Eurex members can achieve maximum efficiency around their euro book. To this end, we are also targeting increased liquidity in zero-coupon inflation swaps. This will be of particular interest to our pension fund participants as they further develop their OTC IRD exposures at Eurex Clearing and look to realise efficiencies by managing inflation risk at the same CCP.
This should not give the impression that building liquidity in any product is a purely organic process, though. It requires multiple stages of development and close cooperation with the market. Interdealer brokers have to be providing prices, trading venues like Tradeweb have to develop screens. We work closely with both, as well as other parts of the clearing ecosystem, such as matching and optimisation services. We expect that optimisation in particular will continue to be a key focus across the market going forward.
This year, we have been working on developing our Polish zloty OTC IRD offering, the other currency covered by EMIR 3.0. AAR has created a strong regulatory underpinning for the currency to be cleared at Eurex, and consolidating the majority of PLN activity at a single CCP will enhance margin efficiencies and mitigate exposure to a potentially volatile basis. Creating a smooth transition is therefore paramount and we are already in the process of launching a market-making framework to support the liquidity build, as well as reliable pricing and a transparent basis. We will also play a central role in supporting the Polish short-term rate (POLSTR), the market’s new reference rate that launches in 2026.
We are deeply encouraged by the engagement we have received from the dealer community from our first meeting earlier this year to support our Polish zloty plans. Twelve banks have since executed Polish zloty trades with us, plus we are starting to see end client activity. That is testament to an impressive collaborative effort to fully understand AAR and then move together to build liquidity.
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