Article: Benefits of Clearing Euro Listed Derivatives & IRS through one CCP08 May 2015 | Byron Baldwin
Benefits of Clearing Euro Listed Derivatives & IRS through one CCP
Clearing Euro Fixed Income Futures and Options, Euribor Futures and Options and Euro IRS through three CCPs is inefficient and costly both for the Buy Side and Sell Side.
Both the Buy Side and Sell Side benefit from the cross margining efficiencies of clearing Euro Listed derivative products and IRS through one CCP whereas the Sell Side has the additional benefit of reduced default fund contributions and reduced capital regulatory requirements by clearing listed derivatives and IRS through one CCP through the netting of exposures. Eurex Clearing's innovative portfolio risk margining system, PRISMA, margins by way of Liquidation Groups, comprising of products in each group that have similar risk characteristics - the Fixed Income Liquidation Group comprises of Fixed Income and Money Market Futures and Options, Swap Futures and OTC IRS.
A good example of the benefits of clearing Euro Listed and OTC derivative products on one CCP can be seen by analysing the initial margin requirement and default fund contribution of a Eurex Bund Future versus a Ten Year Fixed Payer Euro IRS - Euro Asset Swap trade. The analysis below compares the cost of a Ten Year Euro Asset Swap trade in terms of Initial Margin and Default Fund contribution of clearing the products across two separate CCPs to that of clearing both Bund Futures and OTC IRS at Eurex Clearing. The analysis (see below) showed a 69% reduction in total costs, in terms of reduced Initial Margin requirements and Default Fund contribution - a significant saving.
Synthetic Euro Asset Swaps can be created using DV01 weighted Eurex Euro Swap Futures versus Eurex Euro Bond Futures. Again, significant margin efficiencies can be achieved - between 64% and 80%, depending on maturity of the synthetic asset swap - by clearing both products through Eurex Clearing:
Another example of the benefits of clearing all Euro Listed and OTC products through one CCP is analysing the initial margin requirements of a relative value DV01 neutral Euribor Strip versus Schatz Future i.e. 'Term Ted' trade. The analysis (see below) again shows significant margin benefits to both the Buy Side and Sell Side of clearing Euribor and Euro Fixed Income Futures through Eurex Clearing.
In conclusion, 'the proof is in the pudding' - four actual Banks' propietary Euro Fixed Income Futures and Euro IRS portfolios were analysed, comparing the costs of clearing Euro listed derivatives and IRS on separate CCPs to that of clearing all products on Eurex Clearing. The analysis (see below) showed that by clearing all Euro listed derivative and IRS through Eurex Clearing generated between 40% and 59% cost savings.
Prisma portfolio risk margining: http://www.eurexclearing.com/blob/294792/9c0910e525ecde02b50cf0dd3574cc35/data/eurex_clearing_prisma_brochure.pdf
Eurex Euribor Futures Fee Waiver - waives transaction fees from April 01, 2015 to June 30, 2015. Details: https://www.eurexchange.com/exchange-en/resources/circulars/EURIBOR-Futures--Transaction-fee-waiver/1665728
Let me know your feedback via the comments, Byron.