14 Sep 2021

Eurex

Q&A on the STOXX® EUROPE 600 ESG-X derivatives -Development of volume and liquidity with Danske Bank




Thomas Busch Ph.D., First Vice President, Equity Derivatives Sales, Head of Equity Derivatives Strategy

Question: Thomas, thank you for taking the time to share your thoughts on the development of ESG derivatives and especially on the STOXX® EUROPE 600 ESG-X. When did you start trading the product and what do you see in the recent developments?

Thomas Busch: At Danske Bank, we started trading the ESG-X futures (FSEG) from day one and I think we may have even made the first trade. Since then, the product evolved from being the first European equity index benchmark aligned ESG future, a niche product, to the most successful ESG derivative worldwide.

Question: In your opinion, what makes the product so successful, what are the key elements?

Thomas Busch: Apart from the first movers' advantage, I think three main factors contribute to the success of the ESG-X:

First, it's client alignment. STOXX® and Eurex involved clients from the start in the design of this new ESG index. It was great to see how the feedback from leading European asset managers in the ESG space was incorporated into the index methodology. The close alignment and personal engagement with the stakeholders led to identifying the most common exclusion criteria for a new ESG index, forming the basis for massive demand.

Second, it's the simple exclusion concept of the ESG-X. An exclusion concept is easy to understand and the index is still very close to the standard benchmark. The tracking error is not high and due to the exclusion, the ESG-X index doesn't create any exposure towards controversies. Therefore, ESG compliant funds no longer have exposure to controversial businesses or blocklisted companies (e.g., UN Global Compact violators or Tobacco companies) by using derivatives. It is also easy to calculate the index level and therefore price the future.

And finally, as it is close to the benchmark, the market participants are aware of the index behavior, correlation and historical volatility. They can simply adapt their trading strategy to the new ESG derivative. So, it is easy to start trading, enabling participants to join and provide quotes and on-screen liquidity, creating further interest and demand.

Question: How do you see the interest of your clients and what are your experiences trading ESG-X.

Thomas Busch: Client interest is continuously growing and if you look at the last roll figures, you can clearly see an increase in traded volume, meaning that more and more clients change from regular to ESG benchmark indices. During the last roll, we experienced an extraordinary well-maintained order book / on-screen flow and even executing larger contract sizes was no issue at all. Also, we observed a relatively high share coming from customers.

Question: Could you tell us more about trading in the order book and how you handle option (OSEG) trading on ESG-X?

Thomas Busch: We experience tight on-screen pricing for both futures and options from markets participants. That is important for creating further liquidity. We genuinely experience great interest from market participants to help provide liquidity, as well as for larger trades. The order book is robust and comparable to the regular STOXX® EUROPE 600 future (FXXP).

Question: Looking ahead towards demand and, therefore, the development of ESG derivatives, do you see further criteria that need to be considered for successful ESG index derivatives?

Thomas Busch: Yes, we do see that our clients are evolving on ESG engagements and new ESG teams are defining more and more concrete and firm-specific goals, targets or even impact values. In general, and on an industry level for the derivative usage, we expect carbon emission to play a more prominent role and the ESG score becomes more relevant.

Question: And which would be, or is, the one major success factor?

Thomas Busch: At this evolution state, I think the key driver for success in ESG derivatives is the liquidity in the products.


Find here the liquidity highlight update of the ESG-X.


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