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Fixed Income Market Briefing

Release date: 21 Dec 2017 | Eurex Exchange

Fixed Income Market Briefing

Latest Briefing

Market briefing

Fixed income markets within Europe were relatively quiet in November. There are a number of reasons for this, such as the lack of event risk and the low level of realized volatility in the underlying rates markets. As a result, Bund volatility has failed to break out of the 4-6% corridor that we have witnessed for much of the year. While equity markets have continued to reach new highs in expectation of President Trump's tax reform, European rates have remained anchored and traded in tight ranges.

Furthermore, swap curves remained flat and government bond spreads narrow. Looking at the price action across rates, it is hard to see where the next catalyst will come from within Europe. In the near term, with the extension of the ECB's QE program, it is likely that sovereign paper will maintain its bid and volatility will remain anchored, which is likely to see carry trades hold their bid as well.

Let's turn to a positive development in the fixed income space: Options on Euro-BTP Futures have traded 54,000 contracts since 2 October 2017. This gives me great confidence that the product is well positioned to benefit from a normalization in rates and a pick-up in realized volatility. In late November, Eurex launched Fixed Income ETF Options, which reflects Eurex's ability to respond to the apparent growth in passive investments. This new product launch provides investors with greater flexibility to hedge and manage their exposure to fixed income, corporate bond and high-yield bond markets. I am looking forward to seeing how these products will perform in 2018.

On a final note, I would like to take the opportunity to thank all of our members for their continued support throughout 2017 and to wish you all a very Merry Christmas and a Happy New Year. I am looking forward to continuing to work closely together in 2018.

Lee Bartholomew
Head of Fixed Income & FX Product Research& Development

Facts & Figures

 

 

On 20 November 2017, Eurex launched options on three iShares Fixed Income ETFs:

  • iShares USD High Yield Corporate Bond ETF
  • iShares J.P. Morgan USD Emerging Markets Bond ETF
  • iShares USD Corporate Bond ETF

"The growth of fixed income ETFs in Europe has expanded the range of investors and the ways that they use ETFs. These investors are telling us they need options on our fixed income ETFs, to provide a way to manage volatility in portfolios using a tool that is more representative of the cash bond market", says Brett Olson, Head of Fixed Income iShares in EMEA for BlackRock.

"Fixed income ETFs offer investors an exchange-traded source of liquidity for fixed income exposure", adds Lee Bartholomew, Head of Fixed Income & FX Product R&D at Eurex. "They allow for cost-effective exposure to the corporate bond market. Furthermore, our new products provide investors with greater flexibility to hedge and manage their exposure to fixed income, corporate bond and high-yield bond markets." Find out more.


Since the launch of Options on Euro-BTP Futures (OBTP) on 2 October 2017, 54,000 contracts have been traded. Two Market Makers are actively quoting on the screen and providing liquidity in the off-screen market. 11% of all contracts have been traded on the screen and 89% in blocks. 

We now have 32 members actively trading the contract (as expected, the top members are brokers executing client orders with Market Makers) and another six taking up trades.


Eurex took another strategic step to further enhance its market structure by applying its core competences around transparency and efficiencies to the over-the-counter (OTC) market.

Eurex has enhanced its existing market structure with the electronic price discovery service Eurex EnLight, which allows banks and brokers to selectively contact Market Makers with requests for quotes (RFQ) in order to find a trading counterparty. Orders are then automatically transmitted to Eurex’s T7 Entry Service for exchange trade confirmation and post-trade processing.

Our new Eurex EnLight RFQ platform brings together brokers and Market Makers to safely negotiate off-book trades.

The fully automated solution replicates the core aspects of the voice business, whilst providing the benefits of automatic electronic data collection and timely retrieval of this data to meet best execution requirements under MiFID II. The increased electronification of the off-book business ultimately improves overall market liquidity and increases structural diversity.


Eurex Clearing's offer to accelerate the development of a liquid, EU based alternative for the clearing of interest rate swaps gains broad market support. So far, 25 market participants from the U.S., the United Kingdom, Continental Europe and Asia have already decided to participate in the program. The early sign-up period expired on 20 November, and the participants have been disclosed on the Eurex Clearing website.

Furthermore, Eurex Clearing cooperates with major execution platforms for OTC-traded interest rate swaps to enhance its price transparency, price discovery and liquidity. BGC Partners, Bloomberg, i-Swap - a TP ICAP Group company - and Tradition's Trad-X are each seeking to become an "approved platform" as part of the the partnership program's framework; Tradeweb has already been recognized as one.

The program rewards interest rate swap price makers for providing competitive Eurex prices to both the inter-bank and end-user market via execution platforms. Find out more.

As of 4 December 2017, Eurex Clearing offers Clearing Members the option to accommodate indirect clearing, as well as gross omnibus segregation for direct clients. With indirect clearing arrangements under EMIR and MiFID II becoming effective as of 3 January 2018, an additional layer of segregation identifying direct and indirect clients is now available. Clearing Members are able to select the appropriate level of segregation by setting up separate client position accounts and multiple collateral pools for direct and indirect clients in all clearing models offered by Eurex Clearing.

For more information about how to set up accounts for indirect clearing, please refer to the "Indirect Clearing Member Guide" available on the Eurex Clearing website.

Additionally, Eurex Clearing extended its existing omnibus segregation offering to provide Gross Omnibus Segregated Accounts (GOSA) for direct clients. All Non-Clearing Members and registered customers will automatically be classified as GOSA clients. Direct clients can request to hold positions in a separate position account and become known to the CCP as specified clients. The introduction of GOSA increases the likelihood of porting, and of a client directly receiving any balance from the default management process in the event of a Clearing Member default. 

For more information about which level of segregation is right for you and your clients, please refer to the "Client Asset Protection" brochure on the Eurex Clearing website.


Events

Did you miss our webinar on 28 November? Don't worry - just click here to watch TABB Group and Eurex Exchange explore how market conditions and regulatory mandates are combining to drive the electronification of fixed income derivatives markets.

MiFID II has been a catalyst for change, presenting not only challenges around compliance but opportunities in the often manual and opaque fixed income markets. The ability to preserve key elements of the OTC trading workflow, whilst leveraging the benefits of electronic price formation could be a key advantage for market participants looking to manage fixed income trading and exposure in the new world.

Topics include:

  • Trading workflows under MiFID II
  • Best execution requirements
  • Benefits of the request-for-quote (RFQ) model
  • Post-MiFID II best practices

Hosts:

  • Radi Khasawneh, Analyst, TABB Group
  • Randolf Roth, Member of the Executive Board, Eurex Frankfurt & Zürich AG

Kind regards,
Philip Simons


Eurex Exchange - The home of the euro yield curve.



 

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