Find
10 May 2021

Eurex

Micro futures launch set to bring new participants to Europe’s futures markets

Micro futures have been one of the biggest success stories across the global derivatives market over the past two years. In a recent webinar, held on the launch of Europe’s first micro futures on Eurex, panelists from Eurex and RSJ discussed the potential for the products and the benefits they bring to the market.

Author: Will Mitting, Managing Director, Acuiti

On 19 April, Eurex launched a suite of micro futures on three key European benchmarks. The new contracts, which are at least ten times smaller than the main benchmark futures, have lower daily margin rates and are heralded as a cost-efficient way for global investors to access the European equity index futures markets.

The launch follows similar successful contracts in the U.S. and, according to Megan Morgan, Global Head of Equity and Index Sales at Eurex, form part of the exchange’s strategy to expand the global investor base in European futures markets.

“Globally, there has been an increased demand for smaller contracts, and for Eurex, the launch of these micro futures is a strategic move to offer products and services to the entire market,” she says.

Eurex has launched the micro contracts on three major European indices: the DAX®, EURO STOXX 50® Index and the SMI®.

The DAX references the 30 largest and most liquid companies on Deutsche Boerse’s XETRA market representing 80% of the aggregate market capitalization of listed companies in Germany and more than 1,000bn euro of market capitalization. The EURO STOXX 50® comprises the 50 largest companies on XETRA, while the Swiss blue-chip index SMI represents the 20 largest companies on the SIX Swiss Exchange.

The micro futures have a multiplier value of 1 EUR/CHF. In all other aspects, they are based on the same structure as the larger contracts with three quarterly expiries and the same settlement methodology.

“The micro contracts give investors across the globe the opportunity to fine-tune their index exposure with a more granular futures contract,” says Eugen Mohr, VP of equity and index sales Americas at Eurex.

“The lower notional values mean lower margin requirements, so they represent an effective calibration of diversified portfolios and a cost-efficient way to access the European market. Finally, the products are available for 21 hours a day, giving access to all investors around the globe.”

Building liquidity

Morgan says the first step to building liquidity in the contracts is to work with market makers and liquidity providers to create liquid order books in the micro contracts across all time zones. At the same time, Eurex is working with brokers across all regions to create a global reach to ensure investors have the tools to access and trade the products.

Taken together, the three chosen benchmarks bring new trading opportunities for existing market participants trading on Eurex.

The EURO STOXX 50® is the leading European benchmark and among the most liquid benchmarks globally and has a wide array of products that reference it from ETFs to Total Return Futures. The addition of the Swiss Index alongside the two other European Indices allows investors to trade different strategies across the micro contracts.

“EURO STOXX 50® is a broad portfolio of the Eurozone, while the DAX® reflects Germany and the SMI is typically a more defensive index,” says Tobias Ehinger, Expert, Equity & Index Product Design, Eurex, “The launch of micro contracts provides the opportunity to trade across all of these products but also to trade them against global indices like the S&P and Asian indices.”

Eurex extended its trading hours in 2018 and has strong liquidity now in the benchmarks across all time zones. Trading in the DAX® and EURO STOXX 50® micro contracts runs from 01:00 to 22:00 CET and the SMI® from 08:00 to 22:00.

Bringing new participants to the market

For global investors, the micro contracts bring several benefits, including the ability to execute their strategies with greater precision. Another benefit is the ability to trade during periods of elevated volatility when the volatility-adjusted nominal exposure for the larger contracts could be too high–The new micro futures are also expected to increase interest in European futures markets, particularly from investors who are currently trading unlisted products in the less regulated OTC space. Trading futures brings significant benefits over the OTC markets. Trading on an exchange is transparent, liquid, open and secure. The order book is open to all market participants in a fair and transparent manner and counterparty risk is mitigated by central clearing Market makers on listed markets ensure liquidity and tight spreads throughout the day providing liquidity to the markets against which order can be executed orders at fair value. In addition, the depth of futures markets allows for an absorption of significantly larger volumes than the OTC market with full price transparency. “The exchange is independent, with no conflict of interest vis-à-vis its trading participants,” says Mohr. “On top of that, the exchange has multiple layers of safeguards in place, including an independent market surveillance program that reports directly to the regulator. In addition, all products are risk managed and cleared by the CCP; hence, counterparty risk is reduced. These are solid arguments for trading on a regulated exchange over an OTC platform.”

The launch of micro futures is an important step in further developing Europe’s financial markets, providing opportunities for various investment needs.

“Listing micro futures is a great opportunity to bring new participants to the market. We are putting multiple broker agreements in place around the world and are focusing on education,” says Mohr. “Over the past year, thousands of new investors have started trading futures for the first time and with the help of brokers across the world, we will bring more global investors to European benchmarks.”