ANALYSIS: Eurex eyes 'second phase' in active account reforms

Just over three months after the AAR took effect in late June, the German exchange’s global head of sales and marketing said the first stage of the implementation is largely complete.

Jens Quiram, who was promoted to the global role following an organisational change in April, said: “The first half was driven by onboarding where we added more than 650 new clients which was a major undertaking. Our clearing members, the clients and our onboarding team did a fantastic job ensuring onboarding ran smoothly and avoiding the bottleneck situation we had previously warned about.

“Everybody prepared in advance for June 24, so we now have over 2,200 clients onboarded and we are still seeing a significant number of static data requests on our side as well as new accounts from outside of the EU.”

European regulators introduced in late June the requirement that European firms establish an account with a European clearing house like Eurex to enable the clearing of Euro-denominated interest rate derivatives, an activity that is currently focused on London.

Quiram added: “The first phase, which involved testing the pipes by doing one or two transactions and checking the workflow, that was in June, July and August. That is more or less over. The second phase is now underway which involves a bigger group of the new accounts starting their activity.”

The regulation targets Euro interest rate futures and options, which mostly clear at Intercontinental Exchange’s London-based clearing house, and Euro interest rate swaps that clear at LCH, part of the LSE Group.

Eurex launched in November 2023 an initiative designed to harness the regulatory tailwind created by the AAR by incentivising European firms to move more of their business to the German market and away from its London-based rivals.

In the past two years, Eurex’s short-term interest rate (STIR) futures volumes have picked up, hitting a record 4.6 million lots of three month Euribor futures in March last year before falling back to about 2 million lots each month late last year and the start of this year, according to FOW Data.

More recently, around the AAR in June, Euribor futures volumes have ticked up again, reaching 3.5 million contracts in July and 3.3 million lots in August, according to FOW Data.

This gives Eurex a market share of just over 10% in the main European short-term interest rate futures market because ICE Futures Europe traded in August 26 million lots of Euribor futures, according to FIA data. The Eurex incentive scheme also applies to the smaller and newer market in futures that reference the Euro Short-Term Rate (ESTR), an alternative to Euribor.

“We don’t expect to see many more new clients coming onboard in the EU. Of course, there are always changes but I think this is a high representation of the people who are falling under the obligation. There was sufficient time to get prepared and thankfully everybody did their homework,” said Quiram.

The Eurex sales and marketing head said there is still some uncertainty among clients about the minimum activity requirement and conversations with regulators are ongoing around that. But Quiram wants to maintain the momentum.

“Now it is about activation and scaling across over-the-counter (OTC), STIRs and all the products in our universe to offer the cross-product margin efficiencies as the Home of the Euro Yield Curve. So now it is about moving from ticking the compliance box to benefitting from the broader value proposition that Eurex can offer.”

Eurex’s proposition is that clearing all Euro interest rate products including short and long-term rates, interest rate swaps and repo in one place enables margin savings for clients. The German exchange already has longer-dated interest rate futures and options, hence the focus on STIRs and swaps.

Quiram said: “Cross-product margining is available between OTC and listed products including the STIR complex. Further, we have also included our credit index future in this universe, and we are including repo next year.”

Looking at FOW Data, Eurex has reported over the past three months stronger growth in STIR open interest than in trading volumes, with the exchange’s three month Euribor futures open interest hitting an all-time high of 480,000 lots in August, according to FOW Data.

This is not a coincidence, said Quiram: “Open interest is always seen as a key signal of liquidity. Even if liquidity in the order book is strong, in a situation of stress, market participants need to have certainty that there are other members active and trading on this market. So open interest is a signal that they are not alone, and this is a liquid market in all situations.”

He said Eurex’s open interest is now at 1.2 million contracts across Euribor and ESTR futures and combined volumes are around 8 million lots a month. “These contracts are highly liquid and we have seen increase in activity as STIRs are part of the Active Account Requirement.

“We continue to onboard more clients including regional banks and buy-side clients. This ensures a more diverse order book with different parties which of course makes it more attractive for other users,” said Quiram.