Having launched the TRF segment in 2016 as a pioneering example within the futurization theme, Eurex has since managed to migrate over 50 per cent of the EURO STOXX 50® OTC market to its product. The current open interest stands at 1.5 million contracts. Now Eurex is extending its strategically important index segment by collaborating with two leading index providers: FTSE Russell and STOXX. Randolf Roth, Member of the Eurex Executive Board, explains the important role of the TRF segment and the strategy behind the cooperations.
Randolf, how would you rate the development of the TRF market in general?
It’s in progress, by which I mean that TRFs are still a relatively new product and have some way to go. Prior to launch, the Eurex product design team worked very closely with key market participants to ensure we had the right product construct but, nevertheless, getting a completely new type of futures contract into the participants’ operational systems takes time and is in some cases ongoing.
Having said that however, the increase in open interest, which is the key metric for these products, has been at an impressive rate and the 1.5 million contracts mentioned equates to over €55 billion in notional value. The EURO STOXX 50® Index TRF captured approx. 80% of the OTC TRS interdealer market. This certainly validates the fact that TRFs provide, as intended, a genuine alternative to the OTC swaps market and are the foundation for further market development – such as those products launched today.
Eurex is collaborating with two leading providers, FTSE Russell and STOXX, in this segment. What is the strategy behind that?
From a short-term perspective, the use case for the TRF is based upon those indices that have a significant level of assets under management (AUM) and specifically in structured product usage – and this is not limited to one index provider.
STOXX plays a key role in the European sphere and thus we are also launching EURO STOXX Banks and EURO STOXX Select Dividend TRFs, which have significant AUM.
With EURO STOXX 50® and now FTSE 100 we cover the two largest in Europe, so it made sense to initiate a relationship with FTSE Russell. We see this as a first step of an ongoing and wide-reaching relationship.
Is the expansion of your offering to the UK index provider a result of Brexit?
The issues facing our key market participants, such as the impact of Uncleared Margin Requirements (UMR) on balance sheets and capital usage, are not regional. The TRF offering aims to ameliorate the impact that regulations have on the current OTC business by providing a centrally cleared offering.
At Eurex this has the additional benefit of allowing cross-marging with the large pool of equity and equity index derivatives already in situ. The aim is a comprehensive product offering that facilitates balance sheet efficiency and allows a broader distribution to clients who may not have access to counterparty swaps agreements (CSA) currently. And these facts apply irrespective of location.
What’s next for Eurex’s TRF segment?
The TRF offering can be broadened to facilitate other areas where OTC trading is still prevalent. A specific example is equity financing where our newer Basket Equity TRFs, designed to support that segment, are starting to gain some traction. There is also scope for both a wider product offering, as well as attracting new customer segments. In particular, the TRF can also be used as an alternative instrument for beta replication, especially for buy-side clients who currently trade OTC swaps and will be brought under the auspices of UMR over the next 2 years. We have really only just got started.
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