On a number of fronts, Eurex excelled in its support of, and offering to, the derivatives market in the past year. It demonstrated its strength as Europe’s largest and one of the world’s leading derivatives exchanges, and an ability to innovate and push forward new segments in risk transfer markets.
It is for these reasons, together with an intimate understanding of its core market and ability to maintain service during periods of high volatility, that Eurex is GlobalCapital’s European Derivatives Exchange of the Year.
For Michael Peters, Eurex CEO, the exchange has focused intensely on ensuring it provides maximum support to the market during the pandemic at the same time as facilitating important trends that have been amplified and accelerated by it. These include, most notably, the shift to electronic execution and the sharp rise in focus on environmental, social and governance (ESG) issues.
ESG has, indeed, become one of the most profoundly important growth areas in global finance, and Eurex, with 22 products on global, European, and regional ESG indices and outstanding contracts worth over €4bn, is “now the global market leader in this area,” according to Peters.
Additionally, Peters says the exchange is also the global platform for MSCI derivative contracts and is increasingly the go-to venue for Asia Pacific MSCI derivatives. What’s more, Eurex has continued to innovate, launching a new set of micro futures (which have reached an average daily volume of almost 15,000 contracts in the first six months from launch), as well as Bitcoin ETN futures — the first regulated market in Bitcoin-related derivatives in Europe — and ESG fixed income ETF futures.
The transformation toward greater sustainability and social and environmental responsibility is in full swing. Functioning capital markets are a prerequisite for the success of this transformation
Such innovations play directly into rising market demand. Yet ingenuity can come in direct response to market challenges, too. One of the biggest for investors last year was the uncertainty and risk around expected dividend payment. As such, participants either wanted to avoid this risk or hedge it, but annual expiries alone no longer captured the risk of dividend uncertainty. In response, Eurex introduced quarterly expiries in October 2020 and, since then, some 2.2m contracts have already been traded, representing 28% of the total volume of single stock dividend futures.
For Peters, it is this type of “continuous innovation in our product and service offering” that distinguishes the exchange from its peers. In support of this, he points to the leadership Eurex has demonstrated in developing total return futures, and in so-called passive liquidity protection (PLP).
“There is hardly a better product than our total return futures, which show what the transition from bilateral business to transparent exchange trading can look like,” he says. Since 2016, Eurex has managed to migrate over half of the EURO STOXX 50 OTC market to its TRF product, and current open interest stands at 1.8 million contracts – equivalent to nearly €90 billion in notional value.
On PLP, Peters explains that Eurex has essentially established a market mechanism that can help improve the liquidity picture and price discovery process of the order book where price discovery is significantly driven by underlying or exogenous markets.
“After two years, we can see it contributing to a level playing field and creating a more attractive order book,” says Peters. “PLP not only ensures fairer competition, it also prevents latency arbitrage and strengthens trading participant diversity.”
These are important innovations for the market, but they don’t tend to generate the headlines some other product developments do, especially those related to cryptocurrencies. Although increased use of cryptocurrencies by investors and companies is creating speculative bubbles, Eurex believes in their long-term status as an institutional asset class, which is why it launched Bitcoin ETN futures.
“With this new contract, we offer clients access to the price of Bitcoin in a regulated on-exchange and centrally cleared environment,” explains Peters. “This is the first regulated market in Bitcoin-related derivatives in Europe. There are no concrete plans yet, but these futures are the starting point of a family of products that we plan to launch over time in consultation with regulators.”
Looking ahead to the remainder of 2021 and beyond, Eurex sees three structural drivers that, together with cyclical developments, are shaping the exchange and its strategy.
The first is what Peters calls ‘futurization’, which is driven by the increasing need for listed and CCP cleared derivatives following regulatory reforms such as the Uncleared Margin Rules. The second is the shift from active to passive investment, and the third is the importance of ESG.
“The transformation toward greater sustainability and social and environmental responsibility is in full swing,” says Peters. “Functioning capital markets are a prerequisite for the success of this transformation.”
