Saturday, 25 March 2023

CCP Basis - Large LCH-EUREX basis - not unexpected

On Thursday and Friday, Marc was presenting a workshop on “multi-curve and collateral framework and IBOR transition”.

Among the slides presented was this one:

This is a back-of-envelop computation of IM funding cost (Margin Value Adjustment - MLA) to take advantage of the CCP basis. This computation leads to a 1.5 bps annualized at each CCP, i.e. 3.0 bps total. The slide was presented with a graph of the recent LCH-EUREX basis in EUR done a couple of days before and showing the peak at 4 bps for the 10 year.

The same day that the slide was presented, the following article was published in Risk:

Eurex-LCH basis hits new highs amid rates vol

This shows that the basis, which looks like an arbitrage, is very difficult to monetize, that 4 bps may not be a strong anomaly but just a feature of the market and that constraints on the market by regulators may have unintended, but not unexpected consequences.

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