Eurex has doubled revenues from clearing over-the-counter derivatives and Deutsche Börse's clearing house aims to increase market share as the UK leaves the European Union.
Theodor Weimar, chief executive of the German exchange group, said on the third quarter results today: “Over-the counter-clearing, which is part of Eurex, had strong double-digit growth rates.”
Deutsche Börse reported that revenues for Eurex OTC clearing were €18.1m ($20.4m) in the first three quarters of this year, compared to €7.8m in the same period in 2017. OTC notional cleared volumes were €11,312bn in the year to date to the end of September, more than ten times the €1,034bn in the first nine months of last year.
Rival LCH, the clearing business of London Stock Exchange Group, clears the vast majority of swaps globally, including euro contracts. Due to Brexit, the European Union has proposed that systematically important clearing houses that clear euro derivatives have to be located in the EU after Brexit.
Brexit
There have been concerns that EU firms would lose access to LCH if there is no Brexit deal agreed when the UK leaves the European Union in March next year. However, the Financial Times reported today that the European Commission will allow EU27 firms to access UK clearinghouses on a temporary basis in the event of no deal.
Walt Lukken, president and chief executive of FIA, said in a statement that the trade organization for futures, options and centrally cleared derivatives welcomed the news, which provides reassurance for Europe’s derivatives markets.
“Our members, which include key EU27 clearing firms, have been discussing the need for such a step with European policymakers to provide continuity of access and prevent market instability,” Lukken added. “However, other issues remain to be resolved, particularly in regard to continued access to other financial market infrastructures such as trading venues and trade repositories, for which similar reassurance is required. We look forward to further clarification of EU contingency plans in the event of a no-deal Brexit, both at a pan-European and national levels.”
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Partnership program
To prepare for Brexit, Eurex Clearing launched a partnership program this year to build a liquid alternative for processing euro denominated interest rate derivatives in the remaining EU27.
Deutsche Börse commented on the Eurex partnership program in its third quarter report: “Progress has been made both in terms of new client onboarding and in terms of revenue.”
Chris Turner, an analyst at German bank Berenberg, asked on the call why OTC clearing revenues only rose 8% in the third quarter while volumes increased by a larger 14%. Gregor Pottmeyer, chief financial officer at Deutsche Börse, replied that Eurex clearing has a market share of 10% in OTC clearing and the aim is to grow to 25%.
“We are focussed on buyside clients where there is a higher margin,” Pottmeyer added. “We currently have 150 buyside and we intend to add another 100 in the next six months.”
Eurex Clearing last week said it would expand the partnership program to repo and OTC foreign exchange, which is still largely uncleared.
The exchange said in a statement that the design of the program extension is complementary to the OTC interest rate derivatives segment, which started in January 2018.
“Eurex Clearing is currently working with market participants to be the first major clearing house to offer a comprehensive cross currency swap clearing service,” added Deutsche Börse.
Both programs are due to start in the first quarter of next year. Deutsche Börse said Commerzbank, Deutsche Bank, JP Morgan and Morgan Stanley have shown early interest in joining both new segments. In addition Citigroup, DekaBank and LBBW have indicated they want to participate in the repo program.
Charles Bristow, co-head of global rates trading at JP Morgan, said in a statement: “We welcome the planned extension of this successful program which is aimed at broadening market participants’ clearing options for the new asset classes and increasing resiliency.“
M&A
Weimar continued on the call that the primary focus for the exchange is organic growth but the group is also looking for complementary acquisitions.
“We have completed disciplined and focussed M&A transactions but that could go further and we are currently scanning the market,” said Weimar. “We are looking at five areas - fixed income, commodities, foreign exchange, our data offering and investment fund services.”
Deutsche Börse will also continue to invest in technology in the following areas - blockchain; big data; cloud, robotics and artificial intelligence.