Liquidity is magnetic
There is increasing demand from large investors to have listed OTC Total Return Swaps versions as part of the so-called futurization process. Eurex became the world’s leading exchange in dividend derivatives and Total Return Futures (TRF) by tapping in early on this demand. So, when large investors asked FTSE Russell for an on-exchange traded version of the FTSE 100 OTC total return swap, Eurex became their natural partner. There is an old saying in the financial industry, ‘liquidity is sticky’. This might be often true, but moreover, “liquidity is magnetic”. Proven success attracts more business.
Eurex has great expertise in TRFs since launching their successful EURO STOXX 50® benchmark TRF back in 2016. The partnership with FTSE Russell led to the launch of the first FTSE 100 TRF on Eurex. The addition to the Eurex portfolio brings U.K. equities exposure on top of Eurex’s existing TRF offering on European Indices. Eurex developed the new FTSE 100 TRF in close cooperation with FTSE Russell. They launched a new FTSE 100 cumulative dividend point index that basically accrues all the dividends paid by the component companies over time. FTSE Russell specifically designed this index for the FTSE 100 TRF. Together, Eurex and FTSE Russell created an excellent replacement for the FTSE 100 total return swap.
Total Return Futures can easily replace regular index futures from a directional trading point of view. But contrary to regular index futures, where liquidity gathers in the first two quarterly maturities, TRFs trade up to a ten-year maturity. This allows investors to get flexible index exposure without the need to roll positions every quarter. And, due to the nature of TRFs, dividends are included in the paid-out index performance. The price is adjusted with the overnight funding rate (SONIA), which represents the cost of borrowing capital overnight.
With ten years of maturities offered, a significant portion of trades are so-called calendar trades, i.e., buying a TRF with one maturity and selling a different maturity. By doing so, investors can trade the implied repo term structure. Short-term implied repo has different drivers to medium/long term implied repo rates and these spreads could be used to generate revenue or hedge specific risks. These repo strategies are particularly familiar to fixed income or delta-1 traders.
Eurex and FTSE Russell, a partnership that pays dividends
There is more to the partnership than just FTSE 100 TRFs. The partnership pays dividends as it allows Eurex to list various FTSE 100 derivatives. Having the FTSE 100 derivatives available within the Eurex and Eurex Clearing ecosystems brings additional benefits to all market participants.
Eurex launched multiple product categories on FTSE 100 earlier this year. Eurex now offers futures and options on the regular FTSE 100 index, allowing investors and traders to take and adjust exposures on the major U.K index and offset them with other European indices within the same trading and clearing environment. Eurex also launched the FTSE 100 Declared Dividend Index Futures (FTDD), creating a clean way to trade dividend exposure on FTSE 100 in line with the other dividend derivatives offered by Eurex.
Exploring the future of the partnership
The launch of the FTSE 100 TRF has been promising, with more than a billion notional traded since its introduction. One of the drivers behind the success of Eurex in moving liquidity from OTC to listed in general is the award-winning Prisma Risk Model created by Eurex Clearing. In short, the model is a portfolio-based margining mechanism that can offset margining within the complete suite of products that Eurex offers. This creates significant margining reductions for market participants and is Eurex’s magnet to attract even more products into its offering. Based on the initial success of the partnership and the strength of the Prisma Model, Eurex and FTSE Russell are looking at launching other segments in partnership.
Here you can watch the replay of our joint webcast
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