Deutsche Börse Group's derivatives exchange Eurex has introduced a range of USD-denominated futures on the Eurostoxx 50 index. The new product is targeted at investors seeking to participate in the performance of the index without being subject to currency fluctuations between Euro and US dollar.
As an exchange Eurex has relationships with market players that are also engaged in the OTC market, according to Colin Bennett (pictured), head of Eurex equity and index product development. "In addition to following the activity of this market segment, we also react to demand from market players," said Bennett. "In this case, we were approached by issuers transacting in the OTC market with a specific demand to have this instrument available on exchange."
According to Bennett, the reason why those providers approached the exchange with this product idea is two-fold. "On the one hand, providers are looking to replicate some of their OTC activities on-exchange to address the issue of counterparty risk - some market players are continuously offloading their quanto-related risk to hedge funds, but they would prefer to have a central counterparty," said Bennett. "On the other hand, cost of trading in the OTC market is another driver for this move towards a cheaper and more transparent set up."
Regulatory developments and the drive towards transparency have highlighted the benefits of an exchange, said Bennett. "We see that a number of players in the structured products market would like more products to be listed on an exchange, because of the higher capital requirements of recent regulatory changes and counterparty risk issues in the OTC market," said Bennett.
The new quanto futures will finally settle into the same level as the Eurostoxx 50 index futures, "which are the most liquid derivatives instruments in Europe", but with fees and margins being paid in US dollars. Currently, quanto risks coming from US dollar denominated structured products are primarily hedged by banks via OTC forwards.
For Eurex the addition of futures instruments is a logical step in this segment. "We see a much wider support from market participants for this kind of product, for example quanto options are also a possibility," said Bennett. "If there is an OTC trading pattern becoming visible with bigger block trades - and if the instrument has a certain degree of liquidity, then we would consider listing them."
At market launch, Eurex will offer a special market-making program to incentivise order book liquidity. A number of participants have already signaled their interest in market making.
"With the new quanto futures, Eurex will offer an on-exchange alternative to the OTC market, enabling the trading of equity/FX correlation but also providing non-European clients the ability to trade European equity exposure in their preferred currency," said Mehtap Dinc, member of the Eurex executive board, responsible for product development, in a statement .
Eurex's equity index portfolio covers futures and options on some of the most liquid global, European and national indexes such as the Eurostoxx 50 index, DAX, SMI, RDX, USD index or Kospi, Taiex and MSCI indexes as well as derivatives on all 19 Eurostoxx and Stoxx Europe 600 Supersectors.
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