The price discrepancy between euro interest rate swaps cleared through Eurex Clearing in Frankfurt and the London Clearing House (LCH) SwapClear persists, fueled by a lack of differentiated pricing from interdealer brokers, according to market participants.
While active hedge fund trading has narrowed the gap at the shorter end of the curve – where sufficient two-way flows exist to balance buyer and seller positions – a broader disparity remains. Some argue that if brokers routinely quoted Eurex prices separately, the basis, or price difference, could be further reduced. This situation has been observed amid increased volatility in interest rates and ongoing debate over the transfer of clearing activity to Eurex, spurred by proposals from the European Commission.
In March 2023, the Eurex-LCH basis reached new highs, signaling an imbalance in trading flows. This occurred as uncertainty grew regarding the extent to which activity would shift to Eurex Clearing. The dynamic is tenor-dependent, meaning the difference in pricing varies significantly depending on the length of the swap contract.
Eurex has been actively monitoring the balance between fixed-rate payers and receivers among its client base, using a metric called the Portfolio Balance Indicator (PBI). This indicator, which uses net Delta-One (DV01) exposure by client as a proxy, provides insight into the composition of positions being cleared at Eurex.
Data compiled by Eurex in August 2020 demonstrated its resilience during the height of the COVID-19 pandemic. Despite expectations that liquidity might shift back to LCH during the crisis, Eurex maintained its position as a reliable euro liquidity pool. At that time, one client undertook a portfolio switch valued at roughly €5 million in basis point terms, and others began backloading bilateral portfolios or resuming switches from LCH.
Recent analysis of request-for-quotation (RFQ) data shows an even split between Eurex Clearing and LCH, suggesting that the market is not automatically reverting to the larger clearinghouse during periods of stress. Dealers were found to be quoting competitive bids at both Eurex and LCH, depending on the specific swap tenor.