As the world transitions from the ‘new normal’ to something resembling the ‘old normal,’ we sat down with Megan Morgan, the Global Head of Equity and Index Sales at Eurex, to get her views on the derivatives landscape that lies ahead of us.
So, thanks to UMR, acquiring OTC volumes went from impossible feat to easy win?
No, UMR, and the market as a whole, just challenged us to think differently and adapt our approach. We were always a highly standardized market – one big benchmark for all. That’s how we created our success and our deep pools of liquidity. Now came the UMR/OTC challenge - create an ecosystem that allows the market to customize trades but in a standardized, liquid futures contract. This is why we listed such a wide range of MSCI contracts. It lets clients customize their exposure down to the country level. We also apply this concept in Factors.
Deutsche Börse acquired Axioma in 2019. Their reach into the buy side in the factors space is quite robust. They have 7,000 global users of their optimizer, powering over 2TN of AUM each day. We launched a suite of Axioma Factors futures last month based on market demand for listed derivatives in the factors space to use for tactical trades, overlay strategies, and de-risk global portfolios. We decided to build these indices as a toolkit – where you can go long the index, go short the index or isolate the factor itself by trading it against the standard benchmark future. This toolkit includes six factors on two indices - Value, Momentum, Low Risk, Size, Quality and Multifactors covering Europe, using the STOXX® 600 and the U.S., using the STOXX® USA 500.
How will the ESG market evolve following its recent success?
It has become evident that ESG is here to stay. As millennials come into wealth, we see particular themes that will drive our business forward and ESG is at the top of that list. The European market is quite advanced in ESG investing. In the absence of regulation mandating derivatives usage in sustainable investing, asset managers in Europe believe it is their fiduciary duty to apply ESG principles to as much of their portfolios as possible. This includes derivatives. So, this maturity of our home market is both a benefit and a challenge. We find ourselves at this interesting cross-section where the market wants to trade and demands liquidity in ESG derivatives. At the same time, each asset manager has well-developed, detailed sustainable investing principles and wants to trade according to these principles. So, we could customize indices to these very specific ESG mandates, but that would mean sacrificing liquidity. And vice-versa.
Our strategy puts building liquidity as a priority. While the market has a myriad of different opinions on what should go into an ESG portfolio, there is commonality on what should be screened out. Thus, we launched our first ESG index futures at Eurex two years ago with a suite of exclusion indices. As of today, we have seen over 3BN EUR open interest accumulate in the STOXX® 600 ESG-X derivatives and 225M EUR in the MSCI EM ESG Screened. The story here is liquidity. In the ESG-X, we now have eight on-screen market makers and see that the BBO size is bigger than the standard benchmark futures. So, we are starting to reach that inflection point where we have a liquid ESG contract.
We are now moving into Phase 2 of our listing strategy, moving away from indices that are simply “ESG Safeguards” and into more advanced selection criteria, producing indices that optimize “ESG characteristics.” We launched EURO STOXX® and DAX ESG futures in November as an alternative for those using EURO STOXX® 50 and DAX as benchmarks, and next week we’re launching MSCI ESG Enhanced Focus futures on EM, World, USA, Europe and Japan. Our ESG portfolio evolves, and we aim to have a suite of products that not just offers an ESG benchmark but the E, S and G components as well.
How will Eurex remain competitive in the future?
The European landscape is becoming more competitive. This is something we take very seriously. We do not take our front-runner position for granted. Earlier this year, we announced a tick size reduction in the EURO STOXX 50® futures to reduce transaction costs for the buy side. We have spent the past three years rolling out a market structure roadmap focused on building liquidity in the order book. And, we have launched an electronic RFQ platform making the block trade market more accessible, plus a price-improvement auction in the order book to ensure buy-side customers running algos have a backstop. These are all tiny steps on their own, but collectively, they provide a framework that ensures the deep pools of liquidity required by the buy side. Again, our experiences help shape our future. The product suite today is very different from the offering when I joined a decade ago. That evolution will not end here.
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