Circular No. 067/19: Planned launch of Inter-Product Spread Strategies in Fixed Income Futures – Preliminary launch details

1. Introduction

Eurex Deutschland intends to launch an initial set of Inter-Product Spreads for Fixed Income Futures as a standardised futures inter-product spread strategy (e.g. Bund-Buxl spread) effective on
16 September 2019.

This circular contains preliminary information on the proposed changes and drafts of the updated sections of the relevant Rules and Regulations of Eurex Deutschland. It provides details for the planned launch regarding the products in scope and the setup and life-cycle of Inter-Product Spreads. The simulation and production launch schedules are outlined, as well as preliminary information on the Liquidity Provider scheme that is to be offered.

Please note that the launch of Inter-Product Spread Strategies for Fixed Income Futures is subject to the approval by the Exchange Council of Eurex Deutschland which is expected for 27 June 2019. Subsequently, the Management Board of Eurex Deutschland will approve the rule changes enclosed in this circular as DRAFT versions and publish these in a separate Eurex circular at a later date.

Simulation start: 14 June 2019

Production start: 16 September 2019 (subject to approval of the Exchange Council of Eurex Deutschland)

2. Participation requirements

Inter-Product Spread Strategies will be available for all members and traders that are set up to trade both futures products from which a given IPS draws its leg instruments. 

Maximum order size restrictions maintained on a clearer, member and trader level for the futures contracts that comprise leg instruments of an Inter-Product Spread apply under consideration of IPS ratios of leg instruments.

3. Details of the initiative

A standardised futures inter-product spread strategy is a combined instrument defined by the Management Board of Eurex Deutschland consisting of a defined number of instruments of two different futures products and a corresponding leg ratio that do not differ in maturity. Inter-Product Spread Strategies are 2-legged products that ensure DV01 neutrality. IPS provide investors with a capital efficient hedge against a parallel shift of the yield curve and direct exposure to changes in the flatness and steepness of the yield curve. They also allow for trading of the spread between different European government bond futures without legging risk. Inter-Product Spread Strategies at Eurex Deutschland will trade in separate non-implied order books as common for standardised option strategies. 

Eurex Deutschland will offer IPS for combinations of front month futures only. The cheapest-to-deliver (CTD) basket of a given futures maturity will be monitored to forecast the possible CTD basket composition due to new government bond issuances. The IPS leg ratios will be derived according to the most probable CTD bond. New IPS strategies will be available for trading from the Monday onward that follows the quarterly maturity of Eurex Fixed Income Futures. Trading in IPS strategies of a given expiration will stop on the first day the position limits become effective for front months future, i.e. three trading days prior to the last trading day.

IPS order books become available in trading as soon as both legs instruments are in trading. For example, trading in the Bund-Buxl IPS will start in the early morning trading session, as both futures are traded throughout the entire Eurex trading day. In contrast, Long-term BTP-Bund IPS and Schatz-Short-term BTP IPS will be tradable from 08:00 CET until 19:00 CET as the BTP futures legs of these IPS are not tradable during the full length of the Eurex trading day. 

The initial IPS product offering will include inter-product spread strategies comprising the leg instruments FGBL-FGBX, FBTP-FGBL and FGBS-FBTS. Please see the table in Attachment 1 for an overview of initially offered IPS products.

The IPS ratios in this table are for illustrative purposes. Please note that the IPS ratios will differ from expiry to expiry and will be determined shortly before the next new IPS contract becomes available. The ratios for new IPS expirations will be published via Newsboard and on the Eurex website www.eurexchange.com prior to their respective first day of trading.

Production and simulation schedule

IPS strategies will be made available in the Eurex simulation environment effective 14 June 2019. Simulation for Eurex T7 Release 7.1 will be available until the end of August 2019. Thereafter, the simulation environment will only be available with version 8.0 starting 9 September 2019. 

Inter-Product Spread Strategies for the combinations of Fixed Income Futures in scope are intended to start trading in production on 16 September 2019.

Further IPS strategies are planned to be offered for Fixed Income futures following the launch of Eurex T7 Release 8.0.

Liquidity Provider Scheme

The Management Board of Eurex Deutschland and the Executive Board of Eurex Frankfurt AG plan to offer a Liquidity Provider scheme for Inter Product Spread Strategies effective as of the launch date. A DRAFT version of the Product Specific Supplement for Inter Product Spreads in Fixed Income Futures is attached to this circular (Attachment 3) Therein details are provided regarding the Building Block requirements for IPS and the incentives Liquidity Providers shall receive upon fulfillment of these requirements are outlined.

Attachments:

• Attachment 1 - Overview of initially offered IPS products
• Attachment 2 - Updated sections of the Contract Specifications for Futures Contracts and Options Contracts at Eurex Deutschland (DRAFT)
• Attachment 3 - Product Specific Supplement for Inter-Product Spreads in Fixed Income Futures (DRAFT)