7 minute read
Michael Peters, chief executive officer of Eurex
CUSTODY DERIVATIVES ANALYSIS: MICHAEL PETERS, EUREX
Deutsche Boerse-owned Eurex continues to dominate the European derivatives trading market and, as markets recover from the pandemic, the firm is looking to nascent businesses to grow its global presence. By Radi Khasawneh
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Eurex plots global growth amid product push
Michael Peters, who succeeded Thomas Book as chief executive officer of Eurex Frankfurt AG in July 2020, spoke to Global Investor about the key themes for the exchange as the new year takes shape.
“As we look at the overall market landscape and trends for 2022, there is certainly a different dynamic developing,” Peters said. “2021 was very much driven by one theme and that was recovery from the pandemic. Along with that, we have seen a continuation of the theme of rising inflation and potentially increasing interest rates.”
Consumer price measures of inflation started to rise at the end of last year across Europe and the UK, and
that has accelerated sharply in January, prompting central bank actions and rates increases.
“Those themes have remained – we are not yet at the end of the path of recovery – and inflation continues to be driven by ongoing uncertainty in supply chains,” Peters said. “What that means for us and, in particular, for our investors as I look at equities is that there will be an adjustment to dividend expectations with regard to individual companies. We have a great offering in that space, and we have seen quite considerable demand in the first month of the year.”
In the more than 250 single dividend names listed on Eurex, there has been a 25% growth in volume as clients reflect those expectations. Last year, the exchange saw European equity derivatives trading grow 11% year-on-year to 304.8 million contracts. Despite the emergence of a new European derivatives venue (Cboe Europe Derivatives) and a strategic expansion and realignment from Euronext, Eurex has the dominant trading share in European equity derivatives (see chart).
There was also growth in Eurex’s largest segment, European interest rate derivatives, which had a 14% increase in traded volume in 2021, year-on-year. As it looks forward, the exchange expects to build on that product suite to accommodate trending areas such as Environmental, Social and Governance (ESG) focussed derivatives. ESG derivatives on the exchange traded more than 2.5 million futures and 435,000 options on the exchange in 2021.
“The growth rate last year in terms of ADV was 130%, and it is interesting that, in the first weeks of 2022, we have seen the growth rate climb to over 300%,” Peters said. “Looking forward, we would like to expand that product portfolio, both for STOXX and MSCI benchmarks. In the latter case, we also intend to add further options to the ESG space.”
Eurex will also assume a leading role in an update of the methodologies used in the sector as the market evolves.
“We are currently very strong in this area, but I think the next trend will very much be driven by the customer,” Peters said. “In terms of methodology, we started from a point of pure ESG screening; it is clear that there is a need for further development here. We are currently seeing integration and positive screening methodologies and I expect this to move forward to eventually include further environmental and climate aspects.”
Those incremental changes will develop in different ways according to different client types and asset class characteristics, but the exchange has positioned itself to benefit.
“The pace of that change will very much be dictated by the investors – the level of maturity and desire to standardise that exposure with us as the exchange and clearing house. We have bolstered this with innovative offerings on the fixed income side, which complement the breadth of the offering.”
A landmark moment for Eurex was the launch of Europe’s first regulated bitcoin derivative in September, part of a push to develop institutional participation in the region. The futures contract is based on the BTCetc Bitcoin Exchange Traded Note (ETN), the most liquid exchange traded crypto product on Xetra, the equity trading venue operated by Deutsche Boerse’s Frankfurt Stock Exchange.
“Our Bitcoin ETN listed on the cash market was a good first step – to offer a product within the framework of the European regulated environment, supported by both an exchange and clearing counterparty,” Peters said. “We have seen moderate and regular volumes on these products from buyside clients, and the trend is certainly one of growth.”
Part of that growth will be the natural development of further derivatives as liquidity develops.
“We will assess whether it makes sense to offer an option on this ETN during the course of 2022, as well as a potential cash settled Bitcoin contract on an underlying index,” Peters said. “We see a clear tendency that the market is growing towards regulated frameworks, and there is a need for European and global products that service institutional flows.”
Citing figures from Morningstar, Peters believes that the strong European share of the global market referencing thematic indices means client demand for more derivatives based on those indices.
“Derivatives on thematic indices represent another important area for growth this year,” Peters said. “We are currently looking into particular indices such as automation and robotics, breakthrough healthcare, digitalisation
CUSTODY DERIVATIVES ANALYSIS: MICHAEL PETERS, EUREX
and digital security. We believe that, as thematic European funds represent 51% of global assets, we have the opportunity to address this trend. We plan to launch a suite of derivatives based on thematic indices in the coming months as a first step to building that global presence.”
Eurex is in the midst of an implementation upgrade to its derivatives platform – dubbed NextGeneration (NextGen) ETD - which allows for more flexible expirations across products in both the exchange and clearing business, creating the opportunity for new products.
“In terms of technology leadership, NextGen is a new infrastructure piece that we will jointly launch with our market participants,” Peters said. “This is a complex process but provides additional agility and flexibility for both the market and for us. It is really an enabler for the creation of new products. The integration of weekly expiring instruments across different asset classes, and the opportunity to enable volatility strategies in equity options are a few of the opportunities that we would like to capitalise on through this process.”
Peters said the benefits of the system will become clear ahead of the end of the grace period allowing trading of old-style contracts in November.
“It has been challenging for some, but it has been equally a close collaboration” Peters said. “It has included our longest simulation period ever, to address some of the complexity, which will run for five months. Fundamentally the market is convinced that this is a good addition, although we acknowledge that the technological framework in terms of impact on middle and backoffice operations is a major effort for our market participants.”
The exchange also has ambitious plans in futurisation, that is the development of products aimed to replicate over the counter (OTC) derivatives in the listed space, and the exchange has incentive schemes to encourage liquidity in those contracts.
“We have launched and published a new incentive concept at the end of last year,” Peters said. “Customers will benefit from capital efficiencies across TRF (Total Return Futures) products if they transfer volumes to Eurex Clearing from the OTC space.
“In addition, they have the opportunity to enjoy further financial benefits in the next two years. We have seen two firms initially ready, two firms were additionally on boarded last year, and we are in the process of adding an introducing broker. When I look at the pipeline, around five to eight additional firms will be onboarded to the TRF and basket TRF this year. Having added FTSE last year to the TRF index family, the additional focus this year will be on the ETRF (Equity TRF) and BTRF (Basket TRF) sectors.”
European Equity Derivatives Market Shares
Source: FIA
Eurex 6,004,391 - 78.74%
ICE Futures Europe 959,975 – 12.58%
Euronext Derivatives Market 424,410 – 5.56%
Borsa Italiana (IDEM) 97,008 -1.27%
MEFF 72,756 – 0.95%
Cboe Europe Derivative Exchange 66,693 - 0.87%
