As of Friday, 2 December 2016, Eurex, Europe's largest derivatives exchange, will offer Total Return Futures on the EURO STOXX 50® Index. The new futures complement the Eurex suite of equity index derivatives and support the market in complying with new financial market legislation. Under the Basel III capital standards banks already face increased capital requirements when entering Over-the-Counter (OTC) transactions. From next year on, there will be additional standards. "The product is launched ahead of the bilateral margin rules on non-cleared swaps which are likely to be introduced in Europe in early 2017“, said Mehtap Dinc, Global Head of Derivatives Product Development at Eurex.
The new requirement to set aside more capital for OTC derivatives transactions already applies in the US and Japan. It is likely to further change the structure of derivatives markets by supporting the trend to Exchange Traded Derivatives that regulators are aiming for. Eurex Total Return Futures will offer returns analogous to Total Return Swaps; thus representing a functional replacement for these OTC instruments. "We therefore expect market participants to cut back on their OTC swap positions and instead choose futures to meet their trading and hedging needs in the months to come", Dinc stated further.
Another key argument for futures products is their standardisation. Contracts that offset each other can be netted out through clearing, offer cross-margining, and the processing of trades is greatly simplified. On top, Eurex Clearing acts as central counterpary, mitigating counterparty risks. “We expect that larger market participants will adopt the new Total Return Futures, and the transparency and fungibility they provide, to meet their hedging needs in the months to come,” said Régis Lavergne, Deputy Global Head of Equity Derivatives in charge of trading activities at Natixis.
"This is exactly the right time to launch Total Return Futures. They allow the market to continue trading in the new regulatory environment with stronger capital requirements by replicating OTC products whilst introducing the liquidity and position netting available in a standardised futures“, commented Emmanuel Dray, Head of EQD Institutional Sales & Linear Trading at BNP Paribas.
Eurex has a long standing track record of product innovation and constantly continues to innovate in order to meet the market needs. The new futures contract design is aimed at replicating the payout profile of the funded purchase of a cash equities basket representing the components of the underlying index. In line with current market convention the Total Return Futures will trade in „spread“ in basis points and allow the implied repo rate associated with cash basket replication to be traded for the first time.
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