Quick Takes: What is the latest European plan to onshore rates trading?

Ali Curi: Hi everyone and welcome to ION Markets Quick Takes. I’m Ali Curi and every week along with my guests Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog. Let’s get started. Hi Amir. Hi Chris.

Amir Khwaja: Hi Ali.

Chris Barnes: Hi Ali. How are you doing?

Ali Curi: I’m doing great. Welcome back to Quick Takes.
Chris, let’s start with you. What’s your Quick Take for this week? Which headline from the Clarus FT blog would you like to discuss?

Chris Barnes: All right, Ali. I’m going to try and get this right because when I first wrote this blog, I made a number of stupid mistakes. The title of the blog is “What is the latest European plan to onshore rates trading?”

Very aware I’ve only got eight minutes to talk about this. The blog is one of our longer ones. It looks at regulations in Europe, but a couple of stupid things I did is that in terms of writing the blogs, it’s really beneficial for us to find a series to write about, so that we’re not sat there every week thinking, “What the hell am I going to write about now?”
We’ll have a number of topics, which are on rotation. I thought a really easy one would be Europe because we’ve now got three exchanges competing for a volume across ESTR and recently EURIBOR Futures. I thought it’d be really simple; data, pull it in, create a dashboard, there’s something to write about for ICE, something to write about for Eurex, something to write about for CME.

Little did I really appreciate that, of course, overarching all of these efforts by the exchanges, who honestly are better informed than me, is upcoming waves of regulation as well. So now that I’ve started this series on market share for euro futures, what it also means is that I’m now obliged to dig into all of the nitty gritty of the regulation behind it.
So back in very late November, early December, I’d heard that there had been some publications from the European Parliament and European Council regarding their location policy in Europe. So beginning of December, I dutifully, I pulled up this text. I’m really embarrassed to admit, I sat there and read through 75 pages looking for a definition of what an active account requirement exactly was.

And I got to the end and I was like, “Have I missed something?” I’ve read all of this and it’s pretty dry. And I read it and I still don’t see a definition of the active account requirement. So I scroll to the top of the document, December, yeah, it’s December. Double check the date. This document I’ve been reading have been published in December 2022.
I had accidentally read through an entire year’s worth of regulation 12 months too late. And that is one of the pitfalls of writing a blog, right? We aim to cover 85 percent of what you need to know. That means inherently that we don’t know a hundred percent. And so sometimes stupid mistakes like this happen.

And we’re always writing toward a deadline as well. So imagine having wasted all of Tuesday reading 75 pages of text. It was pretty galling. First off, apologies to anyone who spotted a mistake in this blog, that was not intentional. Fortunately, the structure and where things lie from one document published 12 months ago to another published 12 months later is very simple and very similar, right?

So at least when I found the right docs, I was able to find the data that I was after very quickly, and I must admit I’d written a lot of the blog already. There was a lot of frantic editing for this one. What I would say is that, the details are maybe not suited for a podcast of exactly what a active account requirement is. It’s still in the works.

What I tried to do was summarize, in kind of six bullets, of what the active account requirement is. Generally speaking, it’s looking at covering both OTC and exchange traders, derivatives in euros and potentially in Polish as well. They’re also talking about looking at different maturities of trades from what I gleaned, it was up to four maturity ranges and also different trade sizes, up to three different trade sizes and the precise requirements will depend on how big a counterparty you are, but yeah, it looks like this is going to be a really hot topic.

From what I understand from speaking to people who are far closer to this process than I am, what Europe would like to see ideally is these details locked down before the end of the summer. I don’t know what that means in terms of implementation timeline and when people in Europe might actually have to hold an active account, but I think what it does do is speak to what Clarus is seeing in terms of our data in the fight for market share across CME, across ICE and Eurex is somewhat related to this potential for an active account in Europe as well. When I wrote the blog, it was based on November data and November data was the first time that we saw meaningful volumes in the Euribor contract at Eurex.

Eurex has had a Euribor futures contract available for years and years and years. It’s only traded in a few thousand lots or less each month. In November that changed. And so it gives us a really nice perspective for 2024, I think, because from a blog series perspective, it allows us to look at the data, allows us to continue to be on top of the regulations so that we’re not looking at publications from 2022 again, and we can tie in the story of the data directly with the regulatory background.

So hand it over to Amir to see if he’s got any specific questions on that.

Amir Khwaja: Sure, Chris. So I find it very interesting. I’m glad you read the regulations, not me, I think what I find interesting, stepping back at a high level. So we’re talking about Brexit vote happened in 2016, in 2020, UK left Europe, so obviously one of the consequences has been an effort by the EU that in a global derivatives market where trading in Europe swaps and clearing was primarily in the UK, can that move onshore into Europe? And I guess I find it interesting, and obviously it hasn’t happened yet and we’re seeing different regulations attempts because there’s costs to all these things to fragment the global market. And I think what I find interesting is that the economies that are very open, US, so I guess I’ll take US, Euro, Sterling, Canadian, Aussie have tended to be very open capital markets and trading has been global and derivatives, and they’re not as fussed where that happens, right?

So a lot of trading happens in the UK. Clearly, post Dodd Frank, some of the trading venues are now CFTC regulated, so a lot of volume happens. I think there’s part of that, but I guess finding interesting is that and the opposite EU is very open. So much trading clearing happens on UK, US and EU venues.

I guess the question is, what I find interesting is that the only economies which have managed to get onshore, I’d say are probably more closed domestic economies, right? So Japan, China, India have all managed to establish significant OTC derivative clearing onshore. Is that because capitals… , they’re much more controlled domestic economies, also open to global flows, whereas Europe is not?

Chris Barnes: No, for me, the location policy is entirely a political policy. So it’s an intentional decision. I don’t quite understand how that fits in with the desire to make the Euro a reserve currency on the same scale as dollars.

You would think that really all trading in Europe should be as free as possible. I would also say that when you look at what happened with Dodd Frank and that big wave of regulation that hit the U. S., and has been a particular focus of the Clarus blog over the years, that’s only ever been positive for U.S. markets. As a result of Brexit, we saw more interbank Euro swaps, for example, trading on SEF than ever before. It was positive for the U. S. However, when you look at maybe domestic futures, CME trades, Euro dollars and SOFR, that’s a U. S. future traded in the U. S., you look at the Aussie bills, those are traded at ASX.

You look at Sterling SONIA, that’s traded at LIFFE in the U. K. Eurex obviously has massive franchise in Euro govies with the bund bubble shacks. That wasn’t always the case, it’s held up as a textbook example of how true electronification of markets can really move where a product is traded.

But then if you look at that, that was from an outside perspective, a pure competitive play, right? It happens in an open market. It doesn’t happen as a direct result of regulation. So it still feels like a strange policy to talk about, it still feels politically laced, really, rather than having any grounding in, “this has worked for this market, therefore, we should do this,” as a result of that, it’s very difficult to see where the natural end point is. I think the closest example we probably have is LIBOR transition, which again was a solely regulatory driven move. And when we look at our figures, which we’ve blogged on a lot, when you look at RFR trading, it didn’t move naturally. It didn’t move as a result of the market.
It only moved as a result of very significant regulatory steps. And that was the only thing that caused a change in trading. For me in recent times, that’s really the only parallel that I can make with the European policies at the moment.

Amir Khwaja: And so I guess, and the active account proposal is a soft step towards that, right?
It’s insisting that certain European entities have active accounts in Europe for clearing bureau swaps futures, right?

Chris Barnes: Yes.

Amir Khwaja: And over time, as they become more active, I guess the market will vote or there’ll be more impetus to more volume.

Chris Barnes: Agreed.

Amir Khwaja: Yeah, so I think it’s one to watch. And I forget, are there some dates on that? Is there a 2025 date?

Chris Barnes: As far as I’m aware, there are no dates yet.

Amir Khwaja: No dates.

Chris Barnes: I just think reading out between the lines of some of the articles, the desire is to get the specification of what an active account is sorted out in kind of a summer timeframe. I don’t know what the implementation timeline will be after that.

Amir Khwaja: Great, Chris. Thank you. Very interesting. And thanks again for wading through all that documentation. And I wanted to highlight that, I was pleased to see you found the European Commission document refers to the Clarus FT database, right?

Chris Barnes: Ah, true!

Amir Khwaja: One of their sources, yeah. Circled up. That was great to see. Back to you, Ali, I think.

Ali Curi: Well, thank you, Chris. And please share with us again the title of your blog
post.

Chris Barnes: My snappy title for that one was “What is the latest European plan to onshore rates trading?”

Ali Curi: Sounds like a great read. Thank you, Amir, Chris. Thank you both for sharing your Quick Takes.
Let’s do it again next week.

Amir Khwaja: Thanks, Ali.

Chris Barnes: Look forward to it. Thanks, Ali.

Ali Curi: And that’s our episode for today. You can read more about these topics on the Clarus blog and you can follow ION Markets on X and on LinkedIn. Thank you for joining us.