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Erik Müller: “An additional 50 to 100 buy side clients”

Release date: 08 Mar 2019 | Eurex Exchange

Erik Müller: “An additional 50 to 100 buy side clients”

The CEO on euro clearing and market segmentation

This interview was first published in Börsen-Zeitung on 5 March 2019.

Erik Müller, CEO of Eurex Clearing AGZoom

Erik Müller, CEO of Eurex Clearing AG

Mr. Müller, will you achieve the targeted market share of 25% between now and 2020 in the clearing of euro-denominated interest rate derivatives?

In the course of Brexit, that is a realistic goal. Our Partnership Program counts 34 members. 10 to 15 of the largest banks worldwide quote the same levels for swaps cleared via Eurex and via LCH. As of today, we have gained a market share of approximately 11% and are thus in a good position to reach our goal. The threshold of 25% refers to the nominal volume of outstanding euro-denominated contracts at LCH (approx. €83 trillion). In January, we reached a daily volume of €13 billion in long-term euro interest rate swaps (IRSs), whilst our average daily volume in 2018 amounted to €6 billion. Due to the marked increase in the volume of forward rate agreements (FRAs), our market share in that product area already accounts for approximately one third. Overall, the daily average trading volume [for both instruments] amounted to just under €150 billion in January, nearly tripling in comparison to the mean value for 2018.

What is next?

This year, we will focus on preparing the on boarding of buy side names. Currently, approximately 160 end-clients and 60 banks are using us for clearing. Our bank coverage is thus nearly as high as that of our London-based competitor LCH, whereas the number of registered end-clients at LCH is significantly higher (approximately 750). We expect to on-board an additional 50 to 100 buy side clients this year.

Why is this taking so long?

For large fund management companies, on-boarding projects like this are highly complex and can take three to twelve months. As a result, we are still lacking a few major asset management names, which is why we are working intensively to win clients in that area. A U.S. license is required particularly for assets managed outside Europe, in order to be able to offer clearing services to U.S persons. We obtained this license before Christmas. In February, we already cleared the first swap transaction for U.S. fund management companies via Citi as the futures commission merchant. Some of these U.S. fund management companies are active in overnight index swaps (OISs), a segment which is crucial for market liquidity; the funds we are talking about are large, engage in proprietary trading, and provide liquidity to the market, because regulatory changes have reduced the number of banks active in this area. The segment is comprised of many major proprietary trading groups – and we see significant demand here.

The split of the euro interest rate swap market could incur higher costs for market participants. What is your say on that?

Since the G20 summit in Pittsburgh in 2009, derivatives clearing has gained regulatory upside. However, what the market probably did not expect is that interest rate swap clearing would concentrate on only one central counterparty (CCP). From a market view, this is unusual – there are at least two providers in the equity and bond market, as well as in the information business. Brexit is accelerating the establishment of a second euro liquidity pool, since risk managers for pension funds and insurance companies realise that they need a second choice.

If the market in London is split, and the pure euro business moves to Frankfurt – won't that lead to inefficiencies and incur additional costs?

We have proven the sceptics wrong, who warned that spreads would widen. Hence, a large part of the argument for the calculation of potential cost increases has dissipated. The second part of the argument concerns the so-called basis. In contrast to spreads, which would actually mean higher costs for the industry, the basis is a neutral indicator from an economic perspective, dependent on the direction of the portfolio, i.e. whether we are talking about fixed payers or fixed receivers. As soon as we have two liquidity pools, we have a basis. In euro clearing, however, it is very low, which tells us that the market is confident in the existence of an even balance between fixed payers and fixed receivers in Eurex Clearing.

But aren't two liquidity pools less liquid than one single pool?

Two pools enhance innovation. We are collaborating with external providers on the question of how to perform risk transfers between two central counterparties. The industry wants to know how to transfer entire portfolios. Market participants have to decide for themselves whether they want only one provider, in which all currencies are also centralized, or not. Today, the sheer size of the market is generating more and more talk of risk diversification and competition. That is a trade-off. Of course, it makes sense for a Citi or J.P. Morgan trader to execute new, additional transactions via the same central counterparty, since this leads to optimal efficiency from a margining perspective. From the point of view of a whole bank, however, the optimum might not have been reached yet, since banks must also take the risk assessment of such a market structure into account. I think the market has already decided that, for risk reasons, two pools are better than one. And efficiencies across individual currencies can be optimized.

What do you mean?

We can offset over-the-counter (OTC) derivatives with exchange-traded derivatives (ETD) in a liquidity pool. A new type of efficiency replaces the potential loss incurred when OTC derivatives denominated in dollars and euros are in one pool. That is why I am expecting a stronger concentration on individual currencies. We strive to become the "home" not only for euro-denominated OTC and ETD transactions, but also for funding and financing transactions (i.e. also reverse repurchase, or repo, agreements), and want to bring them together in a single pool.

One last key word: open access. Stock exchanges are legally bound to grant access to another clearinghouse. EuroCCP has now made such a request. How is Eurex dealing with this?

That is a cash market topic, the issue here is Xetra connectivity. Regarding the connection between central counterparties, however, we have consistently argued over the past years – and still hold the same opinion – that a mandatory connection would introduce new and unknown risks into the market infrastructure system. This applies particularly to derivatives, since the CCPs have different standards, for example regarding risk profiles or capital resources.

The interview was conducted by Dietegen Müller.


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