Industry groups warn on EUREX/LCH basis volatility

Industry groups warn on EUREX/LCH CCP basis
A joint statement issued today by European industry groups has warned that “large, volatile, and unpredictable price differences between CCPs (called a basis)” will arise if the European Commission forces EU firms to clear at a EU-based CCP.

The proposed amendment to EMIR known as the ‘Active Account Requirement’ was recommended in early December 2022.

Market participants previously said the proposal “seemed to push everyone to one-side” during end-2022 with the basis for most of the curve (except the longer-end) turning more positive.

Since then, traders say the "political risk" to the basis had already begun to diminish during 2023 amid opposition to the proposals from end-users. Also, in its response to the EC, the ECB warned that any minimum clearing requirements should be gradual and phased-in, see Clients eye EUREX/LCH basis. 

In the market today, the indicative-mids on the screen were all unchanged with 5y at 1.0bp (vs high of 1.55bp Dec 2022), 10y unchanged at 3.0bp (vs high of 4.05bp Dec 2022) and 30y at 1.25bp (vs low of -1.3bp Dec 2022).   

Meanwhile, today’s joint statement issued by seven European associations - ranging from ISDA to the Federation of Dutch Pension Funds - sets out its opposition strongly.

It warns that, “the proposed Active Account Requirement (AAR), would negatively impact EU capital markets by introducing fragmentation and loss of netting benefits, and make the EU less resilient to market stresses, with no benefit to EU financial stability.”

It adds the proposals would, “significantly increase the cost and risk of hedging for EU clients. Ultimately, it would harm European pension savers and investors”.

The full statement can be read here.