Interdealer broker Trad-X has launched a central counterparty (CCP) switch service between Eurex Clearing and LCH.Clearnet, a first for Europe as it gears up for the incoming swaps clearing mandate.
The service will enable participants to move positions from one CCP to another to optimise their margin exposures.
“In a world where derivatives products are not completely fungible between CCPs, the most effective way of limiting the open interest risk and mitigating margin inefficiencies is to avoid holding positions in the same portfolio,” Dan Marcus, CEO of Trad-X, told The TRADE Derivatives.
The launch of the CCP switch service for Euro-denominated interest rate swaps follows the launch of a similar service between CME and LCH for USD derivatives on TraditionSEF.
Last year, there was considerable switch trade activity in the US due to the price differential between the CME and LCH, with a large number of buy-side traders shifting their positions to LCH.
However, according to Philip Simons, global head of fixed income trading and clearing sales for Eurex, it is unlikely this will happen in Europe.
“The key to not having a large basis is having a balanced client portfolio, where you have an equal number of payers and receivers within the clearing house, which we have. The fact is that those clients are trading with different members, and then you have a similar client base trading at LCH.
“So the price makers, which are the large investment banks, could end up with equal and opposite positions between CCPs, so they just want to flatten their overall positions. They may also want to look at margin optimisation where you have margin offsets if you stay in the same currency.”
Similarly, Marcus believes that Europe will not see a basis similar to the CME-LCH basis due to the makeup of Eurex’s client membership.
“With the situation in the US with the CME-LCH basis, there were a lot of unbalanced positions where you had a differential client base which led to an asymmetrical supply and demand situation causing a wide basis. Although it is too early to say what the basis will be in Europe, by virtue of Eurex’s more diverse clearing membership we would expect it to be more balanced,” Marcus adds.
While Eurex’s Simons does not expect a switch trade market to develop overnight, activity will most likely pick up when mandatory clearing for different firms comes into force.
“As you see the clearing mandate roll out you will see more client clearing at both CCPs. And the more client clearing activity there is, the more the dealers making the prices will need to manage the positions across those CCPs. It should to start to ramp up as we get closer to the mandatory dates,” Simons said.