21 Dec 2018

Eurex | Eurex Clearing

Erik Müller: Ensemble, c’est tout

Together with our clients, we have a created a real alternative for clearing interest rate swaps within the EU.

Erik Müller, CEO of Eurex Clearing AG, talks about the Partnership Program  for the interest rate derivatives segment, repo and FX, how Eurex Clearing is providing an alternative to clearing in London and how the clearing house significantly reduces the systemic risks inherent to financial markets.

This article was published in "Börsen-Zeitung" on 21 December 2018.

Erik Müller, CEO of Eurex Clearing AG
Erik Müller, CEO of Eurex Clearing AG

Nearly a year ago, on 1 January 2018 to be precise, our Partnership Program was initiated, with 25 participants. The idea behind the Program was – and still is – to present an alternative for clearing OTC derivatives that is based in continental Europe. Twelve months after its launch, it has become clear that the Partnership Program is a success.

Market share of around ten percent

In November, our market share in such euro-denominated instruments was around 10 per cent. Outstanding nominal volume has reached EUR 10 billion, and various financial institutions have talked openly about transferring further business to Eurex Clearing.

This December, Eurex Clearing launched a new service that allows banks to compress their portfolios, reducing their outstanding exposure in the short term and – more importantly – enhancing liquidity in 2019. And it is not only volumes that are growing – it is also the interest in clearing itself. As Brexit looms, policymakers, regulators and the general public have increasingly turned their attention to our business.

35 banks participate

The thought that a trillion euro business could escape the control of EU regulators and competent central banks is a cause for concern. We have responded to these concerns with a market-driven solution in which we share a significant portion of our revenues with the most active Partnership Program participants. We have also invited participants to take a seat in our governing bodies so that they have a say in the development of Eurex Clearing. This approach makes for a true partnership, and a programme that deserves the name. So far, 35 banks have signed up. We will also make our clearing services for interest rate swaps available to end clients from the US, which will result in a significant extension of our target group. We are also looking to establish a service via external providers to help clients in transferring existing positions from one CCP to another. These initiatives serve to prove that competition is not only good for the market – it also ramps up innovation.

New services

Following the success of our offering in the interest rate derivatives segment, we expanded the Partnership Program last month to include repo and FX. More than 25 market participants have signed up for the repo program already. Here, too, we are providing an attractive alternative to clearing in London.

While London is still the mainstay for central clearing of OTC derivatives, in exchange-traded derivatives it is Frankfurt – Eurex Clearing – that is out in front.

With the expansion of the Program, we not only want to extend repo volumes cleared for pension schemes and asset managers, but also those of European government bonds in the interbank market cleared at Eurex. As is the case with interest rate swaps, there is a real chance to establish Frankfurt as the epicentre for risk management in euro-denominated instruments in repo and FX clearing as well.

Repos are collateralised money-market instruments used by banks to cover short-term liquidity needs, with securities serving as collateral. This makes the repo market an important stage in the money market cycle between banks, central banks and investors.
Market participants can ease the burden of regulatory uncertainty and potential post-Brexit requirements if they move part of their business to Eurex. Further, they are granted access to TARGET2-Securities, a pan-European platform for real-time securities settlement in central bank money. Above all, however, banks benefit from a lower level of total assets – a result of Eurex’s unique netting functions for special transactions, general collateral transactions, and general collateral repo transactions.

With the FX segment of the Partnership Program, we deliver the benefits of central clearing to new markets, which are still largely uncleared today. Eurex Clearing is currently working with market participants to become the first major clearing house to offer a comprehensive cross-currency swap clearing service.

Reduce sytemic risks

From repos to interest rate derivatives to FX transactions: central counterparties (the term that regulatory language uses for clearing houses) significantly reduce the systemic risks inherent to financial markets. This makes them a major pillar of the G20 agenda. In 2009, three main reasons for the financial crisis were identified: excessive risk-taking, a high degree of interconnectedness between market participants and poor collateralisation of transactions.

It is our job as a clearing house to produce relief in all of these areas. That is why we identify – in real time – the risks our members are exposed to in the financial markets; it is why we enter transactions as a counterparty and guarantee fulfilment should one of the parties default, and it is why we make sure that transactions are adequately collateralised. And because we are successful in what we do, more and more market participants want to make use of our services, even though they are not legally required to do so, such as the German Finance Agency (the central service provider for the Federal Republic of Germany's borrowing and debt management), Germany's KfW banking group, and the Dutch State Treasury Agency.

As clearing activities increase, market participants have started to wonder about risk management: does it make sense to have all transactions netted with a single clearing house, or would it be better to split the volume? The financial sector has decided to spread the risk and split volumes, and the participants in our Partnership Program have stressed almost in unison that they appreciate the choices our model has given them – independent of Brexit. Against warnings to the contrary, the market’s decision for risk diversification has not resulted in significant additional costs for clients. The price of having OTC interest rate derivatives cleared in Frankfurt is the same as it is in London.

Our Partnership Program is just the beginning, and we look forward to achieving more – as partners for our clients, for the markets themselves, and for Frankfurt as a strong financial centre.