Eurex’s Graulich on the Eurex-LCH basis

Since the ECB gave the first signals of a monetary policy tightening regime in the first half of 2022, there have been persistent pricing anomalies in some of the most liquid areas of the rates markets, including Euro interest rate swaps (IRS). A pricing anomaly very close to home is the Eurex-LCH basis (a CCP basis).

The CCP basis in theory arises from an imbalance in dealers’ inventories at the two CCPs giving rise to initial margin costs, which are then passed down to clients in the form of higher pricing for one side of the trade and lower for the other. The Eurex-LCH basis is highly tenor-dependent. At Eurex, we regularly monitor the balance of fixed payers and fixed receivers amongst end-clients using a metric called the Portfolio Balance Indicator (PBI), which uses net DV01 by client as a proxy measure of exposure. The PBI has given Eurex confidence in the balance of the underlying portfolio structure at the different tenors. Even if not perfectly balanced for some tenors (e.g., 30 yr), the level of balance has at least remained stable or in most instances gradually improved.

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