Eurex Clearing recently launched several new European currencies in an extension of its OTC interest rate swaps clearing platform. In a Q&A with DerivSource, Eurex Clearing explains why the expansion of currency coverage and its collateral services to various European regions is important for derivatives market participants.
Q. What are the drivers behind Eurex Clearing’s expansion of its derivatives clearing currency offering? Is there a reason why market participants required access to a wider range of currencies for central clearing?
Deborah: Eurex Clearing already has a strong presence in Europe, and is seeing increased client demand to extend its product suite into the Nordic region and Poland. For us, being able to offer clearing services in a wider number of local currencies and further focus on regional offerings is a key competitive differentiator.
Additionally, EMIR-mandatory central clearing of fixed-to-float interest rate swaps (IRS) and forward agreements denominated in Norwegian Kroner (NOK), Polish Zloty (PLN) and Swedish Kroner (SEK) will come into force this year. The Danish Krone (DKK) is not yet mandated, but there is increased demand from firms to start clearing all of these before the mandate comes in.
This is not just about currencies, however; it represents a wider push to make sure that Eurex Clearing products are specifically adapted to the region. It is the whole product suite, and how good they are at serving their needs in general, that drives a client to onboard with a central counterparty (CCP).
Q. Focusing on the Nordics first, what specific requirements are you dealing with in the Nordic region?
Deborah: The Nordic countries have certain requirements that other European countries do not have, most notably with regards to domestic collateral requirements. Danish and Swedish mortgage bonds are very important—buy-side and sell-side firms have a lot of these securities so they want the CCP to be able to accept this kind of margin collateral and we are working towards enabling this.
Eurex Clearing has so far allowed an initial set of Euro-denominated Danish mortgage bonds, as a crucial first step on the path to enabling DKK and SEK-denominated mortgage bonds.
In terms of the repo market, Eurex Clearing allows Danish and Swedish mortgage bonds to be used as deal collateral in repo transactions, enabling collateral transformation. Clients can use the repo transaction to repo-out bonds and use the cash as variation margin.
Eurex Clearing is also considering to extend the existing Listed FX Futures and Options offering to further currency pairs, as well as introduce Nordic currencies into our overall FX strategy to facilitate specific regional needs. While still in progress, the FX strategy is developing rapidly. We have been talking to the buy side and sell side to understand how they trade FX and what currency pairs are important to them, which we will take into account when enhancing our current FX offering.
Q. Looking at Poland, what are the drivers behind the new clearing currency offering in Poland, and why are you marketing it now to the region?
Andreas: For Poland, the motivation is twofold. Polish Zloty (PLN) will become a mandatory clearing currency, and our general approach as a European clearinghouse is to clear all products that are mandatory. In addition, Poland has a large population with a rapidly developing economy and therefore it offers interesting business opportunities. As a start, we currently clear Polish OTC interest rate swaps and are investigating to lunch further products to complement our offering, but that will depend on demand.
Q. How is the Polish market changing? What trends are driving your focus on the country?
Andreas: As a European clearinghouse we are looking for business opportunities at all European states with the goal to cover the whole European region. The mandatory clearing for PLN-denominated OTC interest rate swaps fits to our strategy and increased the momentum. In Poland, most of the interbank IRS business is cleared with the local CCP, but there may be increased demand from international banks and institutional clients that need to clear in multiple jurisdictions.
Currently, we are discussing potential offerings with market participants to define the demand for sophisticated trading and clearing services in PLN across several products and to get our market entry right. We are well aware of that the competition is also offering services, therefore it is important to offer the full product suite to ensure market participants benefit from capital, margin and collateral efficiencies.
Q. What new currencies are included and why have your focused on these currencies first?
Deborah: We decided to go live with all three Nordic currencies, even though the DKK is not yet mandated. It is important to have the full product suite, because every country within the Nordic region is very different and it is important to appreciate and understand local requirements.
For IRS, we are going live up to 30 years for DKK, NOK and SEK, and out to 10 years for PLN. For forward rate agreements, for SEK our maturities go up to three years, and for DKK, NOK and PLN it’s up to two years.
For many customers, the option to trade and clear all the way up to the end of the curve, is important. Whilst there is less liquidity in the longer end, many pension funds require the option to trade the longer dated securities.
Q. How will this service benefit users?
Deborah: When our clients are looking at where to clear, it might be just one CCP, in which case it’s important to have full-breadth in the offering. If it’s two CCPs, it’s equally important to have the breadth of offering, so they can transfer risk between CCPs, or decide where to clear their business between the two CCPs.
There are also significant efficiencies in terms of margin offsets. We’ve done some margin analysis across all of our existing currencies. Between the DKK and the Euro for example, we saw up to 64 percent margin efficiencies.
Some of our other businesses within the group are also very present in the region covering the entire value chain in the financial sector. Clearstream with their global funding and financing offering or for example, 360T and their FX platform are another way for us to leverage the existing network that we have and deliver a full product set across the Deutsche Boerse Group’s offering
Q. When will the service be available? How can market participants take advantage?
Deborah: We are live now with all the currencies. There is some administrative work that needs to be done to add the currency in terms of static data, but it is fairly easy to onboard.
We would need to ensure that the clearing member has a relevant account at one of our payment banks, so that variation margin can be handled for each currency. The simulation environment has been in operation for some time, so clients can already test and onboard. But we recommend that any registered customers who are interested should speak to their clearing members, to make sure the clearing member is ready to support them.
Authors
Deborah Garlick is responsible for FI derivatives and FX trading and clearing services for Eurex in the Nordic Markets.With more than 12 years of experience, Deborah has a sound knowledge of Risk Management and collateral management, for both trading and clearing across asset classes. She has worked with clients on derivative topics across Listed and OTC and has been greatly involved in the journey towards mandatory clearing. Deborah holds a BA in English and History and has completed her MBA at Cass Business school.
