On 7 November 2022 Eurex has added MSCI World Factor Futures and MSCI ESG Screened Options to their already broad offer of MSCI derivatives. We spoke with Ralf Huesmann, Product Developer for the segment, about the background and the advantages of this launch.
Ralf, tell us a bit about the background of the upcoming launch.
The MSCI World Index is used by many funds as the global benchmark for developed markets. Futures on this index are performing very well at Eurex, even in two different product versions: in USD, the standard for most MSCI indices, and in EUR, which is frequently used by European end customers. The open interest in these products is increasing and at the same time hundreds of trades are executed daily in the order books. Therefore, "World" seems to be the right region for adding additional product variants.
Factor indices are offering ways to outperform a parent index, like MSCI World, in certain market phases. Eurex will list Futures on seven prominent factors: MSCI World Enhanced Value, MSCI World Growth Target, MSCI World Momentum, MSCI World Equal Weighted, MSCI World Quality, MSCI World High Dividend Yield and MSCI World Minimum Volatility.
Certain factors such as Quality or Momentum have outperformed the parent MSCI World Index over a longer period, but this year high dividend paying stocks or those with lower volatility have outperformed in a bearish environment. Factor futures can therefore be used to overweight or underweight certain factors and improve beta.
MSCI derivatives have reached a combined Open Interest of 2.8mn contracts or 135bn EUR at Eurex. What are the main drivers of this growth?
The Uncleared Margin Rules (UMR) initially brought the major banks into the segment, but as these rules now apply to more and more buy-side clients, forcing them to pay high margins when holding positions outside of a CCP, we are already seeing a lot of activity and expect to see even more participation from these clients over time.
Regulatory factors such as UMR aside, we believe that clients value our offering. It offers good coverage of all relevant MSCI indices via futures and options, a combination of liquid order books and flexible trade entry possibilities, favourable transaction fees, good cross-margining capabilities and more. And they are increasingly recognizing the benefits of using MSCI derivatives when their benchmark is MSCI. Rather than trading and hedging that benchmark through a basket of liquid individual contracts for major regions or countries, they prefer to trade the benchmark itself. It's a trade-off between tracking error and liquidity - and the more liquid an MSCI World Future becomes, the less willing they are to hedge it via a basket.
Back to the launch: next to the World Factor Futures, you will also list MSCI ESG screened options. What´s the story here?
There is a lot of talk about ESG, and this year in particular has been challenging for the development of ESG indices and products. Questions arose about the rating of nuclear energy or weapons. ESG ratings from different providers often diverge, and last but not least, ongoing regulatory developments and bespoke solutions still make it difficult to achieve a level of standardization needed to launch liquid ESG derivatives.
For this reason, screened indices, which follow a fairly simple exclusion method, are still the most popular. But even these models are becoming more sophisticated over time. MSCI has just recently announced that some additional screening methods will be introduced from February next year, where e.g. CO2 emission reduction targets will be included in the concept.
We also see that ESG derivatives are mainly used by end-users and therefore there is a greater need for optionality. With this in mind, we decided to offer the first MSCI ESG options on four different regions: EM, EM Asia, World and US.