Eurex Clearing discusses LCH CCP basis, plans greater transparency

Eurex logo for article final Oct 2020
Eurex Clearing has published a paper today on the key drivers of the Eurex-LCH CCP basis and outlining its plans for greater transparency.

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Eurex Clearing has published a discussion paper today setting out what it sees as the key drivers of the Eurex-LCH CCP basis (see link) and outlining its plans for greater transparency as a means of "minimising" basis levels and volatility. Indeed, the Eurex-LCH basis has been widening again since mid-October and is currently indicated at around 1.2bps at 5y, 2.7bps at 10y, 0.1bp at 20y and -0.8bps at 30y. The paper makes the following main points:


  • "The European Commission has set itself the objective to build a strong and attractive central clearing capacity in the EU. Eurex Clearing aims to be the global home of the euro yield curve and is committed to promoting market-driven solutions to the European Commission’s objective."

  • "One of the main market structure themes that needs to be discussed along the journey is the CCP basis (i.e., the Eurex-LCH basis) for cleared interest rate swaps. The CCP basis results in higher pricing for one side of the trade flow (e.g., pay-fixed), and beneficial pricing for the other side (e.g., receive-fixed)."

  • "The drivers of the Eurex-LCH basis are multidimensional and highly complex, and the recent observed market behavior continues to test the market’s conventional understanding."

  • "While we have seen some significant moves in the basis over the last six months in particular, we do not see that linked to a fundamental imbalance in payer and receiver client flow cleared via Eurex Clearing"


Eurex concludes:


    “Developing an active, liquid market in Eurex-LCH basis swaps, with the right mix of participants, will be key to minimizing basis levels and the volatility in the basis levels. In this regard, Eurex continues to maintain strong working relationships with interdealer brokers and non-dealer market participants. Further, the OTC IRD partnership program provides incentives for services which promote CCP basis trading.”


    “To encourage market participants to act quicker when the opportunities arise, we aim to bring much more transparency to the Eurex-LCH basis.  Going forward, we expect to provide more comprehensive breakdowns of Eurex’s client and dealer volumes, alongside improved disclosure of the PBI by tenor. This will enable market participants to better-differentiate portfolio structure changes from market anomalies in their assessment of the Eurex-LCH basis.”