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Interview with SIG Susquehanna on European Fixed Income options

Release date: 10 Apr 2017 | Eurex Exchange

Interview with SIG Susquehanna on European Fixed Income options

Interview with Jamie Cassidy, Options Trader and Head of European Index Options, SIG Susquehanna on European Fixed Income options and the current market opportunities.

 Q1 What kind of opportunities can be captured with European fixed income options?

 Options on Fixed Income can of course be used to hedge or position around interest rate risk, and this is the primary purpose of the options on German Bunds. However, with the reintroduction of the OAT options, FI options may now also be used to hedge country specific risks, such as the uncertainty surrounding the upcoming French election. I believe any bond product that has a meaningful yield differentiation from the benchmark Bund futures presents opportunities for trading. We hope to work with exchanges and Eurex in particular, to make more of these products exchange tradeable in the near future.

 Q2 What opportunities do you see in options on Euro-OAT futures for yourselves as market makers and for investors in general?

 As market makers, we aim to provide liquidity to all types of investors; from long holders of the bonds, who are looking to hedge potential risk without having to close out of their positions, to volatility-focused hedge funds, who are pricing the options based on analysis of the various scenarios. Often these counterparties are thinking about options in different parts of the curve and we use our own capacity for risk to manage the residual positions while matching off demand and supply as best we can.

Our business model is very dependent on the level of volume trading and so we are very much incentivised to ensure a healthy and transparent screen market, to make it as easy and attractive as possible for investors to get involved in trading options. Our liquidity is available to all Eurex members on the screen, but for larger orders we also provide bilateral prices. Interested parties can contact Cathal or Christophe from our sales team directly, their contact details can be found below.

 Q3 Is market volatility today a result of the upcoming elections across the Eurozone or the prevailing macroeconomic factors?

 There are a number of macro-economic factors underpinning the current volatility being experienced in the market today. The apparent normalization of economic conditions in the US and to a lesser extent in Europe, and the steps being taken by the FED in the US to normalise the interest rate environment in light of that, are certainly topics that the market is watching very closely.

However, it is clear that the French election is being taken very seriously by the volatility markets. There is a spike in implied volatility in May in all the major asset classes, EURO STOXX, Bund and Euro suggesting it is likely to be the most closely watched event since the UK referendum last year.

 Q5 In your opinion, are Eurozone sovereign debt markets correctly reflecting the inherent risks of the Eurozone or are we distracted by external factors such as the Trump presidency, Brexit, etc.?

 I’m not sure Trump has had a sizeable impact on Eurozone sovereign debt markets. However, it’s worth remembering that pricing in these bonds has been very heavily influenced by the ECB’s bond purchasing programme. When markets are heavily impacted by an external force which is not price sensitive, pricing in the affected markets may not be as efficient as expected under typical conditions.

Q6 When did you start trading European fixed income options and what attracted you to this Eurex segment? 

Over the last several years we have been gradually increasing our presence and market share across the Equity derivatives space. By late 2015 we felt we had achieved strong coverage across all these markets and the time was right to expand into other volatility markets so we started to trade Fixed Income options. There were a number of reasons why we felt Fixed Income was an attractive space to pursue. The timing worked well with the current business cycle. It’s not much fun trading options on products that never move, but as the interest rate curve starts to shift up we should see more movement going forward. Also, we believe the changes in regulation should very much encourage on-exchange derivatives trading in the European Fixed Income markets, away from the traditional OTC style. This change in market structure is a significant opportunity as the added transparency and the centralized clearing of exchange trading will allow us to compete for orders which we would not previously have had access to.

Q7 What other markets are you currently active in?

In the equity options space we make markets on virtually every stock in Europe – around 800 in total, and all the major indices.  On the ETF side we have similar coverage, trading over 2500 individual names. The equity derivatives space has been our main focus: last year we traded 11% of the total listed equity options volume in Europe, and were the 2nd most active participant at Eurex overall.

We have a very large presence in weekly options and the VSTOXX products. We traded 25% of the total Eurex volume last year for weekly options, and were ranked #1 in volume for H2 last year in VSTOXX, having only started trading the product a year earlier.

We are always open to market making new products and have worked with Eurex on several launches, OAT options of course being the most recent. Our goal is to increase the tradable universe of listed products and make markets more liquid, efficient and transparent.

Q8 What do you think to the longevity of options OAT?

I think there is good reason for the OAT options to continue to be successful after the French election. Until this most recent catalyst, I think it was standard market practice to cover OAT exposure with Bund options, which was not a bad approach as the products are very similar. However, given the choice people will always hedge the specific exposure provided the required liquidity is available.

Were the French bond spreads to blow out after the election, Bund options will be an inappropriate hedge for OAT positions. This means a separate options market for OATs will be very much sustainable. In the case where the spread collapses and OATs become more similar to the BUND again, I am hopeful that there will be sufficient liquidity in the market to allow long holders to hedge with the OAT options at a minimal additional cost.

Q9 What opportunities do you see in European FIC Markets for Eurex and its members?

Similar to our own opportunities, I think the transition back to a more traditional interest rate environment is a chance for trading in FIC markets. On a more general level I think both Eurex and its members stand to gain a great deal if trading moves from OTC to listed. The challenge we face is to take full advantage of this opportunity, which will require action and co-operation from all the parties involved.

The biggest challenge I see will be the loss of flexibility that OTC trading can provide, as listed contracts by their nature need to be standardized. To minimize the impact of this, we need to provide a healthy and diverse range of tradable products, which participants can use as building blocks to achieve their desired exposures in the listed world. While full flexibility will never be possible, the advantages of better transparency and price competition should more than make up for what is lost. Not to mention the safer trading environment and added stability to financial system that comes with the process of central clearing. This will eliminate the need for a web of bilateral credit exposures inherent in OTC trading, which contributed greatly to the previous financial crisis.  


Sales contacts

Tom Karlsson

Phone: +353 1 802 8118

Christophe Tuaillon

Phone : +353 1 802 8118



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