Eurex sees delayed effects from European active account regulation

European regulators introduced in late June the Active Account Requirement (AAR) that mandates European firms to open an account with a European clearing house like Eurex to clear Euro-denominated interest rate derivatives and reduce their reliance on UK firms.

But the launch was compromised by the fact the European regulator did not publish the necessary regulatory technical standards until three days before the regulation took effect on June 24 and the rules did not bind all European firms from day one.

Eurex’s chief executive officer Robbert Booij told FOW last week: “The fact is the AAR requirement started slowly as there was no formal requirement from day one. The requirement has affected different firms in different ways, we have seen some clients becoming active immediately while others are waiting so there’s definitely more to come.”

Eurex’s chief commercial officer and global head of products and markets said the exchange has made good progress this year onboarding new clearing customers but this has not yet translated to higher volumes.

Matthias Graulich, who was promoted to his current role in July, told FOW: “The Commission has now endorsed the technical standards but they still need approval by the European Council and Parliament which we expect to happen before the end of this year.”

He added: “Given the reporting requirement will take effect six months after that approval, we now expect to see activations picking up from the first quarter of next year.”

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, trading around 3.5 million lots in July, August and September, according to FOW Data.

Eurex competes in the three-month Euribor market with London-based ICE Futures Europe which is the dominant liquidity pool in the main European short-term interest rate future. ICE Futures Europe traded 31.4 million three-month Euribor futures contracts in September, according to FIA data, giving Eurex a market share of about 10% that month.

ICE and Eurex also compete in the smaller three-month Euro Short-Term Rate (ESTR) futures market where ICE traded 6.6 million lots in September and Eurex traded 4.6 million contracts.

Graulich said: “In open interest, we are now about 1.4 million contracts across Euribor and ESTR where roughly 50% are held by liquidity providers. This has been fairly stable with increasing volumes over the last couple of months.”

Looking ahead, the Eurex chief commercial officer said he is confident the active account requirement can make a long-term change to the European STIR market.

He said: “If we look at the history of liquidity pools moving, it requires a disruptive force to be successful. Is EMIR 3.0 and AAR the trigger in this case? We think it has the potential.

“We are committed to this project to building a strong, sustainable liquidity picture in STIRs and offer an attractive alternative within the EU as long as we are convinced we can ultimately be successful.”

Eurex plans to attract Euro short-term futures and interest rate swaps to its clearing house by offering margin efficiencies by offsetting these products against the European government bonds already cleared at Eurex.

Graulich added: “Building out a self-sustaining liquidity pool is the plan for the next 6-12 months – when we exactly reach this objective is hard to say. There are very limited reference points around which we can build intelligence on this point.”