ANALYSIS: Eurex takes stock ahead of key active account regulation

Speaking on the sidelines of the Eurex Derivatives Forum in Frankfurt, Matthias Graulich, a member of Eurex Clearing AG Executive Board, said Eurex’s initiative to break ICE’s grip on the short-term interest rate (STIR) futures market, which launched in November 2023, is meeting expectations.

Graulich said: “We have achieved what we wanted to achieve: to create a liquid alternative for Euribor futures and to build a healthy liquidity picture in the new product of ESTR futures.”

Eurex traded in January 2.45 million lots of its three month Euribor contract, according to FOW Data, making that month the German exchange’s second best month after March last year when it traded 4.65 million lots.

ICE Futures Europe traded in January 36.2 million lots of its three month Euribor contract, according to that exchange, meaning Eurex had that month a market share of 6.5% with the rest at ICE.

In the newer three month Euro Short-Term Rate (ESTR) futures market, Eurex traded 3.04 million lots in January, according to FOW Data, compared to 2.07 million lots at ICE Futures Europe and 232,000 lots at CME Group so Eurex has a market share of 57% in futures linked to the risk-free rate.

Graulich added: “Today, we have some banks that are building open interest more from an end-user perspective than a market-maker perspective with a continuously increasing share but there is still a significant proportion of open interest coming from market-makers.”

In terms of open interest, Eurex had in January 163,500 lots of three month Euribor contracts on its books which compared to 4.65 million lots at ICE Futures Europe so the German exchange had about 4% of the market by open interest.

When Eurex re-launched its Euribor and ESTR futures contracts in November 2023, the exchange opened partnership and incentives schemes aimed at investment banks and market-makers which are now quoting prices on screen.

Asked if he is comfortable with the amount of business coming from market-makers as opposed to end clients such as hedge funds, Graulich said: “It was always part of the game-plan that at this point in time, there would be more activity coming from the interaction between the market-makers. This is what you need in order to build a market. This is a natural step before people say: “There is decent liquidity and open interest so this seems to be a credible order book” before people from the end-client side step in and say: “I will use that liquidity pool now”.”

He added: “You need to build it step-by-step and if you don’t have the market-maker activity, what can you show to the end-client? The end-client won’t come if they don’t see the liquidity picture in the book.”

Graulich said the active participation of some banks is helping the exchange develop conversations with other firms not yet involved.

“We have open interest coming from some banks in the Partnership Program and we are saying to the partners not yet active: “If they can do it, you could do it as well.” So, this is slowly building exposure from the banks that are active in the partnership program and then we will see what the active account generates in terms of additional activity and open interest.”

The European regulator plans to introduce in late June its controversial active account requirement (AAR) which requires some European clients to set up a Euro derivatives clearing account with a European-based clearing house such as Eurex Clearing.

European regulators are uncomfortable that Euro short-term rate futures are mostly cleared by ICE in London and Euro interest rate swaps are largely with LCH, which is also based in London.

The AAR could provide a decent tailwind for Eurex as the German exchange tries to take STIR market share from ICE.

Graulich said: “In the next four months, we will continue the work we have already done: to build steadily the liquidity picture. We are closely working with Partnership Program banks to mobilise more activity which is what we have been doing for the past couple of months and this is resonating and developing in the right direction.”

Under the AAR, firms that clear 85% of their business with a European clearing house are exempt from the requirement including its reporting obligations, which is influencing firms’ decision-making.

Graulich said: “Would I expect that market participants taking advantage of the 85% exemption is the norm for the market? No, it may be more smaller clients taking that option from what we are hearing but clearly that will help in building more paper and open interest from the end-user.”

The AAR should support the Eurex effort in STIRs but the exchange is also keen to stress that clearing more Euro products such as STIRs, the longer-dated Euro interest rate futures already with Eurex and swaps under one roof offers attractive capital efficiencies.

Graulich said: “For many years, people didn’t really worry about margin levels because interest rates were zero or negative. This has changed now in two dimensions: there is a significant higher cost to funding margin requirements, so people start to care more and the other thing that’s happened is people are less interested in the dollar-euro trade and are rather focusing on trading within the currency bucket.”

The Eurex Clearing board member added: “That is something we are seeing now with a lot of basis trading and hedge funds are increasing their activity level on Eurex to benefit from margin savings across futures and swaps. In the cross-product-margining accounts that are active, we are already seeing savings of 60-70%. This take-up is completely independent of any AAR requirements and demonstrating the additional value Eurex can deliver to the market as the Home of the Euro Yield Curve.”