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As geopolitical and macroeconomic events battered market conditions, the debate over European swaps clearing has dimmed, with UK CCP equivalence in place until 2025. But this hasn’t diminished the importance of the work that still needs to be done to support a thriving cleared swaps markets on the continent. Ahead of the Eurex Derivatives Forum on March 22-23, Eurex sat down with Gaspard Bonin, Deputy Global Head of Derivatives Execution & Clearing at BNP Paribas, to talk about the market’s future.
What has happened in the euro swaps clearing market since UK CCP equivalence was extended to 2025?
The war in Ukraine, the European energy crisis, and the UK rates crisis. That is to say, evolution of EUR swaps clearing landscape has not been the main focus of market participants since equivalence was extended early 2022.
But in such a volatile market environment, we have seen the Eurex-LCH basis vary quite a lot, with different movements across the curve. That is a sign that there is activity on Eurex but it also shows that the market is not mature.
We observed imbalances at different point of the curve, especially at 10Y and 30Y points. Fundamentally, there has been a lack of consistent 2-way liquidity from end users, more precisely a lack of offsetting flow for 10Y payers from EU Banks ALMs and for 30Y receivers from EU pension schemes.
What needs to be done to encourage the balancing of flow onto European CCPs?
European CCPs need to keep working on their competitiveness. The best way for market infrastructure to improve in a long-term sustainable fashion is through actual competition. Regulatory-driven flow can create unexpected and unfavourable biases in the market.
This competitiveness needs to be global, especially in OTC derivatives as these are global markets. For EU market infrastructures to grow they need to compete for global flow, including US and Asian firms’. That is not to be confused with USD business as for EUR business alone, non-European firms’ flow is extremely significant. Long term flow from European official institutions would also be relevant to improve liquidity.
What steps can CCPs take to achieve that?
Ease of access is critical. CCPs must work in coordination with authorities to remove regulatory, operational or legal hurdles for market participants. Cooperation with market participants, and especially with clearing members, is paramount to build a sound clearing ecosystem from both risk and economic perspectives.
Coming back to the crises that have hit markets over the last year, what lessons and implications do the energy and UK LDI crisis hold for the clearing industry?
The main lesson to learn is about the way CCP margin models work during these types of crises. The models have evolved but we believe that in general CCP initial margin requirements remain too low in low volatility environments, and thus too procyclical.
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