30 May 2022

Eurex | Eurex Clearing

A Sweeping Change – Eurex announces NextGen ETD launch dates

The next generation of ETD contracts introduces a more flexible approach to handling exchange-traded derivatives (ETD). The new concept allows more than one expiry per month at the product level. Markus Schiller, Project Manager, Strategy & Initiatives at Eurex, and Thomas Winter, Head of Eurex Trading Design, have all the details.

Markus, what is NextGen ETD and its role in Eurex's overall strategy?

The NextGen infrastructure affects Eurex's trading, clearing, risk management and market data layers, in short, the entire financial derivatives market value chain at Eurex. The motivation is to enable additional trading strategies by creating more flexibility in the design of exchange-traded products and strengthening Eurex's competitive position to meet changing market requirements.

Following the introduction of the technical changes to support sub-monthly expiring contracts, Eurex is pursuing three business initiatives that leverage the additional flexibility: Integration of weekly and month-end contracts, MSCI basis trading and volatility strategy trading in single stock options.

Thomas, can you explain these initiatives in more detail?

As far as contracts expiring during the month are concerned, trading in contracts expiring on different dates within a month is already supported by dedicated options products. By supporting more than one expiry date per month per product, the contracts that normally belong to the options products with expiration on the 1st, 2nd, 4th, and 5th Fridays are shifted to the main options products where the contracts are with monthly, quarterly, and yearly expiration that take place on the 3rd Friday of a month.

Once the integration of weekly and monthly expiring contracts is done, these contracts can be used as leg instruments in any option strategy supported by our T7 trading platform. For example, call or put time spreads with weekly expiring leg instruments can be used to transfer positions from weekly to monthly expirations in a single transaction. As a second step, we have also started planning to extend this to other intra-week contracts, e.g., options contracts expiring on Mondays or Wednesdays. However, this second step will not come prior to the first step, i.e. the integration of Friday weekly options contracts into main options products.

The new initiatives also affect volatility strategies in single stock options. Regarding equity indices, delta-neutral trading in index options is achieved by trading option volatility strategies that include the corresponding index futures to achieve delta-neutrality. The same concept is applied to single stock options, using a daily expiring physically settled single stock future as underlying to achieve delta neutrality. Existing settlement and physical delivery procedures will be used to ensure end-to-end settlement, mitigate counterparty risk, and reduce the number of additional trading channels in handling the underlying. The volatility strategies in single stock options are fully available for on-book, TES and Eurex EnLight trading.

Finally, we also offer new opportunities for MSCI basis trading. Daily expiring MSCI futures are used as Leg 1 instrument in futures calendar spreads, which are a basic instrument of quarterly expiring futures used as Leg 2 instrument in such futures calendar spreads. By introducing daily expiring futures with a maturity of three business days and providing the corresponding basis calendar spreads, the quarterly expiring MSCI futures can optionally be settled with an underlying index closing price of the current, next or next but one business day. This means straight-through processed basis trading using the CCP risk framework immediately after the trade and easy access to a wide range of liquidity providers.

Markus, what else can clients look forward to with the NextGen project?

NextGen ETD enables Eurex to offer long-demand trading strategies currently unavailable to our clients. This is made possible by greater flexibility in contract identification, allowing Eurex to avoid cumbersome workarounds and achieve a shorter time-to-market. Fully automated trading strategies are currently traded off-book, OTC or back-to-back will be available for all exchange access channels. The three NextGen initiatives described are only the starting point for using the new logic. More initiatives are already in the works.

Thomas, the business initiatives were supposed to be introduced shortly after introducing the technical changes. Are there delays?

NextGen represents a major change in the ETD world, for Eurex, for our customers and for the vendors. It means sweeping changes for all parties involved. As all participants need to implement the changes to make the launch of NextGen a success, Eurex is in constant and intensive dialogue with customers, vendors, and industry associations such as the FIA. We are fully on track to deliver all technical changes with the releases in June this year. However, we have considered the required lead times, especially for clearing members, and decided to launch the NextGen business initiatives in February 2023.

Markus, what's the current status and when will we see it live?

Since the beginning of December 2021, we have made the NextGen changes available to our customers in the simulation environment for testing purposes. In February of this year, the first sub-monthly, i.e., daily and weekly expiring contracts, were added and can since be accessed via the various input channels. After we received the regulatory approvals from both BaFin and the exchange supervisory authority, we are now approaching the delivery of the technical changes with the June releases. At the same time, we continue to work closely with clearing members, trading participants and front, middle, back office, and data providers to ensure timely market readiness.

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NextGen ETD is just one example of how we mastermind the most efficient derivatives landscape by pioneering innovative products and infrastructures as well as by incorporating 'smart' into technology. True to our mission to create better markets, we offer a broad range of international benchmark products, operate the world's most liquid fixed income markets and feature open and low-cost electronic access.