From niche to mainstream – the growing market demand for listed derivatives (Part II)

Benchmarking has also become a trend in the industry. How is Eurex tapping into that?

One phenomenon we have seen in recent years is the move of investment themes from niche to mainstream. ESG and Factors are two themes with tremendous momentum.

As these themes become codified in the investment work, investors are searching for standardized benchmarks. Creating a benchmark is no easy task. In ESG, we partnered with STOXX® to consult the European and, specifically, the Scandinavian asset management community to design an ESG benchmark. At Eurex, our innovation in this space is liquidity. Liquidity only comes if investors believe that our indices provide the standard proxy for ESG.

Last year, we launched derivatives on four ESG STOXX® indices and we have seen almost EUR 650 million in notional open interest accumulate so far with liquidity accumulating in the exclusion methodology. We continue to build this portfolio by broadening our STOXX® suite by listing a STOXX® USA ESGx Futures and by expanding globally with our MSCI franchise by listing MSCI ESG Screened for EM, EAFE, World, USA and Japan. Last year Deutsche Boerse acquired Axioma, a powerhouse in factors, and merged it with STOXX® to form a new entity called Qontigo.

In January, Qontigo launched 30 new factor indices, comprised of the five main factors and a multi-factor on five regional indices.  Eurex will apply the same process that proved successful in ESG by consulting the buy side, first with the Scandinavian asset managers, to see where we can build liquidity with factor benchmarks.

What other strategies will Eurex deploy to attract OTC flow further?

One of the benefits of the OTC market is the ability to customize your strategy – to precisely express the unique risk you want to take in a trade. One of the pitfalls of the listed market is the need for standardization to ensure there are deep pools of liquidity. We are addressing this delicate balance in three ways:

First, our listing philosophy is to add smaller, more niche-based products allowing market makers to provide liquidity across a broad spectrum of interdependent markets, while also allowing buy side firms to customize their viewpoint.  We have already done this quite successfully in MSCI, where we list over 120 countries, region and broad-based indices and have over EUR 80 billion in notional open interest. We see more and more buy-side activity across the entire portfolio to shift OTC swaps to listed markets. Our goal going forward is to ensure a healthy and active order book and to build up the options market as the final leg to provide a holistic customization portfolio in the MSCI framework.

We are also doing this within the volatility and correlation space. We have listed VSTOXX® futures and options and will look to add to our vol and variance suite of products by launching dispersion and vol swap futures upon regulatory approval.
Besides listing new products, we will look to build a listing platform allowing Custom Index Providers, our bank partners, to trade and clear their custom indices on Eurex in the form of total return futures, price return futures and, potentially, options. This, again, allows the market to take very bespoke viewpoints but also trade in the CCP.

Are there risks involved in this product strategy?

The biggest risk is to fracture liquidity with all the customization. We have been working on a very innovative market structure roadmap to ensure that there is enough liquidity to allow users to deploy their strategies in our order books. Last year, we rolled out several initiatives in the Single Stock Equity Options market as a pilot program. We changed the matching algorithm to ProRata, added all the options to our electronic RFQ platform, EnLight and launched a Passive Liquidity Protection function on the German and French single names. The results were very positive. This year, we will further expand the Passive Liquidity Protection function, enhance the functionality on EnLight and have launched our price improvement function, Improve, into the order book. The goal is to ensure there is enough liquidity in our markets so users can scale their trades in a manner that fits their strategies.

We will also look at structural changes in our current products with the same goal – to ensure the products are evolving in line with the market. For instance, we recently decreased the tick size in the EURO STOXX® 50 futures calendar from 1.0 to 0.25. This led to an increase in trading in the orderbook and decrease in execution price for buyside customers.

How do you see the future for derivatives exchanges?

For Eurex, in particular, the future looks good. The needs of investors are evolving and, as said, the only constant is change. The exchange of the future needs to be nimble, innovative and, above all, a good listener. We are always listening.