08 Sep 2020

Eurex | Eurex Clearing | Eurex Group

RSS futures on Eurex, relative value trading

Interview on RSS Futures

RSS futures were introduced on Eurex in June 2020. We sat down with Richard Aked, Global Head of Systematic Alpha at Maven Securities to get insights into this relatively new class of products' benefits and potential.

Richard Aked, Global Head of Systematic Alpha at Maven Securities

What are the key benefits of this new product?

This product allows you to trade the spread between two listings of the same company in one clear and simple trade.  By replicating a physical holding in the underlyings via a future, you save on several costs such as executing conditional orders, hedging FX, paying FTT, finding the stocks to borrow, financing out the position over dividends and having an inefficient and highly margined position on your balance sheet. The future also gives much more transparency on the spread level and the risk of the spread.

How do Related Security Spread Futures work and how do Liquidity Providers hedge themselves?

The Related Security Spread Future (RSSF) is a cash-settled product that tracks the price of the ratio between two listings of a company. It uses the 5-day average daily settlement price of the two underlying legs leading up to the expiry date as the settlement value. For a liquidity provider to hedge their risk, a long position in the future of e.g., USD 100,000 would be hedged with a short notional position of USD 100,000 in the numerator leg, and a long position of USD 100,000 in the denominator leg. In other words, equal notional in the underlying legs. As the underlying prices move over time, some small rebalancing will be needed to keep this hedge in check.

What is the target group of this new product and how can investors trade them?

The target group for this new group of products is anyone who wishes to take directional views on the spread between two listings of a company or hedge their exposure to such a spread. 

It addresses the needs of Relative Value traders; a strategy that trades in securities of the same company that differ in terms of voting rights or dividends or are otherwise non-fungible. 

As it is rolled out, the product will assist hedgers who need to reduce their exposure to spread movements.  For example, option traders hedging their gamma in the Australian listing of Rio Tinto will be able to trade the London listing and 'lock in the spread' via the spread future to replicate the Australian listing price effectively.  Being able to do this in such a transparent manner is currently not possible.

It is very easy to access liquidity via the order book.  A market participant can simply enter a limit order at the spread level they wish to buy or sell the spread future.  Even though the underlying legs' prices are rapidly changing, the spread, and therefore spread future, remains relatively stable.  This means you do not need sophisticated trading systems to trade the spread future.

What are the main strengths of the design of this new product?

This product simplifies trading the spread between listings into a single trade, removing all other complications that come with cash execution such as short selling, dividend distributions and FX. The market participant can effectively lock-in the holding costs of the spread up until the futures contract expiry.

What makes this product so unique and how do you expect this product to develop further?

Currently, there is no other product on the market that provides the same exposure as this group of products. It is unique because it gives exposure to a ratio and holds the notional constant, making it simple to trade and manage.

As far as development goes, we mostly see the potential in expanding this group of products further to any dual listed company or security that has a fundamental relationship but is not fungible.

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