By Yoruk Bahceli and Neil Mackenzie
LONDON (Reuters) – Underwriting against potential losses in Eurex’s derivatives trades has risen to a record high of about 130 billion euros ($128 billion) in the face of highly volatile markets and aggressive inflation, said Eric Muller, chief executive of Eurex Clearing. to Reuters on Thursday.
That’s up from about 100 billion euros needed during the Covid-19 outbreak that wreaked havoc on global markets in early 2020. Muller told Reuters that Eurex Clearing’s risk models indicate that the current environment means there is a greater need to boost liquidity.
He added that nearly 40% of the total requirements are due to the use of interest rate swaps, compared to a fraction during the COVID crisis in 2020.
Mueller emphasized a different macro backdrop compared to 2020, given a shift in the price cycle, ongoing geopolitical risks and the success of European clearing initiatives.
Eurex Clearing is part of the Eurex Exchange of Deutsche Boerse (ETR:), one of the largest futures and options exchanges and swaps in Europe.
Analysts say the rising demand for collateral could be a sign of increasing investor anxiety given decades of soaring inflation and steep rate hikes from major central banks, not to mention the Russian invasion of Ukraine that has led to an energy crisis in Europe.
“In fixed income as a rough guide, the requirements (for collateral) have doubled,” Mueller told Reuters during a briefing.
“But looking at the past 10 years in price volatility may not be a good guide to what’s happening in the next 10 years.”
For example, the ICE (NYSE: BofA Move Index), a measure of volatility in the US fixed income market, jumped last week to its highest level since March 2020, as British markets fell under sharp selling pressure.
“We are seeing a greater demand for collateral, but it’s not just a demand for the quality of the collateral … but also the ability to reuse collateral, to be able to do that in an efficient way,” Clearstream Securities CEO Samuel Riley said during the same briefing.
He pointed to increased industry talk of “improving safeguards” in general.
Higher-rated government bonds such as US Treasuries or German bonds are often used in the markets as collateral to raise cash. This has at times put pressure on German AAA debt given how scarce they are after years of buying ECB bonds.
“Because of the demands on collateral and the dearth of high-quality collateral, companies have to make sure they maximize the opportunities they have with the collateral they’ve been given,” Mueller said.
Many pension funds were wracked by the surge in UK government bond yields last week that forced the Bank of England to step in. Funds have had to pile up cash to meet collateral demands.
(1 dollar = 1.0167 euros)