Eurex expansion into FX derivatives
Press Briefing 16 June 2005 Chicago
Agenda n
FX Market and Opportunity for Eurex (Rudolf Ferscha)
n
Eurex FX Products Offering (Satish Nandapurkar)
n
Eurex Business Development in the U.S. (Peter Reitz)
n
Summary (Rudolf Ferscha)
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
2
FX Market: Globally relevant n
With increase in globalization and interdependencies, currencies are influenced by multiple political and economic factors and in turn, affect interest rate and equity markets
n
Eurex is a market leader in interest rate, equity and index derivatives
n
FX is the only major financial product and asset class that is not represented on Eurex
n
Entering FX is a natural step for Eurex to expand its portfolio
n
FX’s recent increase in popularity makes this a timely move
EuroSTOXX (6m)
Eurex expands into FX derivatives
Bund Future (6m)
Press Briefing, 16 June 2005
EUR - USD Spot (6m)
3
FX Market: Large, global and growing n
In 2004, Bank for International Settlements (BIS) estimated the foreign exchange market at $1.9 trillion daily notional turnover Turnover was measured to be distributed around the globe, with larger volumes coming from Europe than North America and Asia Overall market growth is being driven by many factors:
n n
– Increasing use of FX as an asset class – Dedicated currency management strategies becoming increasingly commonplace in Europe and the U.S. – Increasing use of electronic trading by financial institutions – Increasing number of market participants gaining access to interbank prices via electronic trading platforms Growth In Foreign Exchange Market 2000
Market Turnover (US$ bn)
1800 1600 1400 1200 1000 800 600 400 200 0 1989
1992
1995
Outright Forwards Foreign Exchange Swaps
Eurex expands into FX derivatives
1998
2001
2004
Spot Trades Foreign Exchange Futures
Press Briefing, 16 June 2005
4
FX Market: Fragmentation across multiple venues leaves development space for new distribution channels Liquidity takers
Intermediaries
Liquidity providers Interbank Market
Tier II/III Banks White labeled product
Prime Brokerage
Global Bank
Global Bank
Traditional buy-side
FX Sales Desks
Corporates
Global Bank
Institutional Investors/CTAs
Interbank market intermediaries
IDBs Single Bank Portals (exclusive distribution platforms)
Individuals/ Prop Firms
Multi-Bank Portals (e.g. Hotspot, FX All, FX Connect
Hedge Funds
FCMs
Eurex expands into FX derivatives
Reuters
Forward prices as basis for Futures Market
Futures Market
Intermediaries
EBS (Bloomberg)
Market participants
Press Briefing, 16 June 2005
5
Customer environment is changing rapidly and FX market is moving towards an Exchange Model
Sell Side
Buy Side
–
Large global banks act as liquidity providers across numerous FX trading venues
–
Integration of fragmented electronic trading liquidity pools via front-end applications is leading to narrowing spreads/margins
–
Growing buy-side volume partially offsets margin compression and reduced profits
–
High portion of fixed IT costs requires increasing market share to stay profitable
–
Additional order flow is acquired by providing in-house platforms white-labeled to medium-to-small sized banks
–
Volumes are increasing as currency risk is more actively managed and FX establishes itself as an asset class on its own
–
Access to interbank prices is easier
–
Hedge funds and proprietary trading firms are beginning to import trading strategies into FX due to easier access and higher transparency
–
Demand for liquidity exceeds supply
–
Medium-to-small sized banks outsource liquidity provision and IT to large sell-side banks but continue to provide FX execution services to their clients via white labeling
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
6
Substantial growth potential in migrating OTC FX markets to exchange traded futures platform Exchange Traded
Traditional OTC FX $ BN per day
2%
2,000
1,500
1,000
500
0 Spot Eurex expands into FX derivatives
Forwards
FX Swaps
Other
Press Briefing, 16 June 2005
Futures 7
Eurex will leverage 23 hour trading capability on Eurex US for entry into the FX market at marginal cost n
Strong customer demand for Eurex to offer FX trading
n
Eurex’s US regulated exchange already offers worldwide access with trading from 5pm Chicago time to 4pm the next day
n
The proven, highly reliable Eurex US platform provides all the functionality FX traders need
n
Eurex market model meets currently unfulfilled needs of FX traders – Anonymous, all electronic trading and complete market transparency – Open access on a level playing field – Low fees for all participants across all geographies – Market practices synergistic with OTC market place
n
The Clearing Corporation in Chicago, with its clearing member firms, will provide clearing and settlement services
n
Global Clearing Link functionality will expand European participation
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
8
Agenda n
FX Market and Opportunity for Eurex (Rudolf Ferscha)
n
Eurex FX Products Offering (Satish Nandapurkar)
n
Eurex Business Development in the U.S. (Peter Reitz)
n
Summary (Rudolf Ferscha)
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
9
FX market entry strategy was based on feedback from many different customer groups
n
FX is a fragmented and growing marketplace with customers seeking greater liquidity across multiple venues
n
Many firms today are in the process of establishing or expanding their FX trading operations and have not yet decided on their trading platforms
n
Price discovery is primarily OTC today
n
Deep liquidity is provided by a handful of global banks who stream prices to multiple FX e-platforms and are supportive of a Eurex entry into the market
n
Physical delivery of the underlying is inexpensive and risk free
n
Cost is a major factor in the choice of execution platform
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
10
FX futures will launch September 23 and provide substantial benefits for end users Product Design
n n n
n
Fee Schedule
Market Readiness
Futures contracts will be listed initially on the major G7 currencies A larger contract size of 250,000 notional, reflecting market demand, will provide traders greater profit potential at less cost Contracts will be quoted consistent with spot quoting conventions, increasing transparency, with smaller minimum quoting increments reducing spreads for end users Straight Through Processing of EFPs will be provided via remote access to the CCorp ACT System
n
Trading fees will be very competitive with OTC trading platforms and significantly lower than other futures markets for both electronic trades and EFPs (especially on a per million $ of notional traded basis)
n
A generous multi-year incentive program will reward supporters who consistently provide liquidity and proprietary order flow from the start
n
Eurex and Eurex US sales teams will coordinate to actively market the products’ attractiveness, liquidity and cost savings to end users and their combined membership bases worldwide
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
11
Eurex will offer the most actively traded currency pairs USD Currency Pairs:
Cross-Currency Pairs:
EUR/USD AUD/USD
USD/CHF USD/JPY
EUR/JPY EUR/GBP
GBP/USD
USD/CAD
EUR/CHF
GBP/JPY
Contract specifications address customer demand for larger, more cost-efficient, OTC friendly products –
Contract size of 250,000
–
Quoting conventions consistent with spot markets
–
Half ticks in the USD/GBP and EUR/GBP currency pairs
–
Electronic calendar spreads with the ability to roll in one fifth of a tick increments
–
Straight-through processing of EFPs with competitive pricing
–
Netting of settlements between currency and cross-currency pairs
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
12
All participants will benefit from attractive fees which will significantly lower their execution costs n
End users and customers will be charged just 50c per contract side* which should bring their all-in electronic execution costs down to $5-$8 per million notional traded
n
Member firms will be charged 10c per contract side for their proprietary trading activities with no membership purchase requirement
n
EFP fees on Eurex US will be lowered to just $2 per million per side
n
All fees for all participants will be waived in 2005
Multi-year incentive programs will reward early supporters Market Makers
Early Volume Adopters
§ § §
Requires continuous on-screen two-way quoting in multiple currency pairs with a monthly volume requirement Thresholds increase over time Will receive full fee waivers and volume pro-rata revenue sharing
§ § § §
Requires consistent trading volume on a daily basis Volume thresholds will increase over time Will receive 50% fee waivers and volume pro-rata revenue sharing There is no limitation to the number of firms participating
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
13
Diversified Order Flow is expected from the start from a variety of market participants globally
Proprietary Traders
Hedge Funds and CTAs
Market Makers Global Banks and Automated Trading Firms provide streaming prices and order book depth
Retail Traders
Eurex expands into FX derivatives
Other End Users
Press Briefing, 16 June 2005
14
Eurex will continue to leverage assets built in the U.S. to enhance the Eurex Global Liquidity Network Regulatory License
§ Provide preferred U.S. regulatory environment and 60/40 tax treatment to U.S. customers
Clearing Clearing Access Access
§ Utilize connectivity to proven U.S. clearing infrastructure
Trading System
§ Provide USD product capability and an immediate launch environment for globally traded products on existing 23h trading platform
Distribution Distribution
Liquidity Liquidity Global Clearing Link Eurex expands into FX derivatives
§ Utilize experienced U.S. sales team to increase volume in U.S. and European products leveraging a U.S. membership community (145+ members), 40+ unique to Eurex US § Leverage Eurex US relationships and connectivity with 25+ proven market making banks and trading firms for new product liquidity § Provide greatly expanded U.S. remote clearing capability via ongoing promotion of Global Clearing Link Phase 1
Press Briefing, 16 June 2005
15
Focus of resources will be on Index and FX products n
Existing Treasury products will remain listed but no new sales, marketing, or incentive programs for US Treasury products will be initiated; Market maker stipends insuring good liquidity will remain in place until end of the third quarter
n
Original risk sharing agreements with equity partners continue and guarantee revenues of $18mn by the end of 2006
n
Resources dedicated to US Treasury products will be eliminated or reallocated to more promising opportunities –
n
Overall headcount in Chicago has been reduced from 34 at launch to 26
Eurex US will continue to pursue antitrust litigation against CBOT and CME –
Predatory pricing
–
Attempting to preclude Eurex US from using CCorp as its clearinghouse
–
Illegal efforts to delay regulatory approval of the Eurex US exchange application, as well as the Global Clearing Link
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
16
Eurex US will provide benefits to customers for costs just incrementally greater than previous representation in the U.S. n
Utilizing proven CCorp infrastructure and services for clearing and settlement
n
Working with Eurex to consolidate technology so that both exchanges run on a single 23 hour capable platform with a single member network
n
Coordinating with Eurex’s sales force in Europe to market U.S. products to European customers
n
Leveraging an experienced staff in Chicago with headcount of only a dozen people beyond that of a Representative office
Eurex US is focused on sustaining the lowest fees for our customers in the products they desire
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
17
Agenda n
FX Market and Opportunity for Eurex (Rudolf Ferscha)
n
Eurex FX Products Offering (Satish Nandapurkar)
n
Eurex Business Development in the U.S. (Peter Reitz)
n
Summary (Rudolf Ferscha)
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
18
Eurex is winning new clients through Eurex US Direct US customers doubled in 2004 140
124
120 100 80 60 40 20
38 2
0
1996
50
57
63
66
68
2001
2002
2003
2004
20 6 1997
Eurex expands into FX derivatives
1998
1999
2000
Press Briefing, 16 June 2005
19
Global Clearing Link allows Eurex to leverage CCorp’s customer connectivity in the U.S. Global Clearing Link launched
100 90 80 70 60
63
50 40 30
Remote Clearing introduced
Phase 1 of Global Clearing Link established direct access for CCorp Clearing Participants to Eurex
20 10 0
3
13
14
2000
2001
2002
20 2003
28 2004
Number of Eurex Remote Clearing Members CCorp Clearing Participants
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
20
U.S. expansion is a major factor in driving Eurex benchmark products to record levels Volume Records
Open Interest Records
Eurex expands into FX derivatives
January through May 2005: § Bund futures/ options on Bund futures/ Schatz futures § Dow Jones EuroSTOXX futures and options § DAX futures and options § Equity options
May 2005: § Bund, Schatz & Bobl futures/ options on Bund futures § Dow Jones EuroSTOXX futures and options § DAX options § Equity options
Press Briefing, 16 June 2005
21
U.S. Participants’ Market Share of Dow Jones EuroStoxx 50 Future Contracts 20.000.000
30%
25% 16.000.000
20% 12.000.000
15%
8.000.000 10%
4.000.000 5%
0
0% 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 1999
2000
US Eurex expands into FX derivatives
2001
other countries
2002
share US
Press Briefing, 16 June 2005
2003
2004
2005
Linear (share US) 22
Turnover potential from the U.S. through extension of trading hours Intraday volume distribution S&P 500 Future
Intraday volume distribution 10yr Treasury Future
140.000
160.000 Current Eurex Trading Hours*
Current Eurex Trading Hours**
Extension
# of traded contracts per hour
# of traded contracts per hour
120.000 100.000 80.000 60.000 40.000 20.000 0 3 p.m.
Extension
140.000 120.000 100.000 80.000 60.000 40.000 20.000
4 p.m.
5 p.m.
6 p.m.
7 p.m.
8 p.m.
9 p.m. 10 p.m. 11 p.m.
0 3 p.m.
4 p.m.
5 p.m.
6 p.m.
7 p.m.
8 p.m.
9 p.m.
10 p.m. 11 p.m.
CET
CET
31 % of daily volumes of S&P 500 futures executed after close of business on Eurex
22 % of daily volumes of 10yr Treasury futures executed after close of business on Eurex
Customers are demanding time zone extension and the Eurex system is now capable of covering additional hours * Eurex Trading Hours for equity index products ** Eurex Trading Hours for European fixed income products
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
23
Successful start of Russell index products
n
Overall market share vs. CME in Russell products is averaging 8%, with Russell 1000 market share averaging 41% and Russell 2000 averaging 7%
n
Joint marketing with retail futures brokerage firms to promote Russell products on Eurex US established
n
Continued cooperation with retail and introducing brokers as well as institutional clients
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
24
Global Clearing Link – Benefits for Eurex n
Lower clearing costs for U.S. based participants of Eurex –
n
Lower entry barriers for U.S. participation due to direct clearing access via U.S. clearing house – – – –
n
Additional U.S. members for Eurex will further stimulate growth on Eurex’s markets GCL offers greater flexibility for global players, while reducing market entry barriers for smaller firms. GCL allows extension to 23hr trading of Eurex products GCL allows local jurisdiction access to trading and clearing global benchmark products
Phase II of the Global Clearing Link will – –
n
Reduction of overall transaction costs will create further volume growth from the US
Create for the first time a fully fungible market across the Atlantic Allow members of Eurex Clearing to clear all products traded at Eurex US and use one common collateral pool to portfolio-margin European and U.S. products
FX products will benefit from Global Clearing link through broadened participation
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
25
Agenda n
FX Market and Opportunity for Eurex (Rudolf Ferscha)
n
Eurex FX Products Offering (Satish Nandapurkar)
n
Eurex Business Development in the U.S. (Peter Reitz)
n
Summary (Rudolf Ferscha)
Eurex expands into FX derivatives
Press Briefing, 16 June 2005
26
Eurex expansion into FX derivatives
Press Briefing 16 June 2005 Chicago