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Removing risk components from single stock futures with Eurex’s new Stock Tracking Futures

Release date: 19 Jul 2019 | Eurex Exchange, Eurex Clearing, Eurex Group

Removing risk components from single stock futures with Eurex’s new Stock Tracking Futures

On July 29 Eurex is launching Stock Tracking Futures on all stocks in the EURO STOXX 50 ® index. We spoke to Sascha Semroch, product developer in Equity & Index Product Design at Eurex, about the new futures.

Sascha Semroch, product developer in Equity & Index Product Design at EurexZoom

Sascha Semroch, product developer
in Equity & Index Product Design at Eurex

What exactly are Stock Tracking Futures? 

Put simply, these are single stock futures without the dividend risk. Traditional single stock futures have an embedded dividend exposure if the estimated dividend payment of the underlying stock differs from the actual dividend paid, an undesired effect for stock performance investors. Of course, in theory, traders could combine single stock futures with single stock dividend futures to exclude dividend risk, but this would not be very efficient as it requires two separate futures. Our new Stock Tracking Futures adjust retrospectively for actual regular dividend payments during their lifetime and thus reduce dividend risk.

How do they work?

We originally saw two approaches, and, as always, we consulted with our clients on what would work best for them. The end result is that our futures will adjust the variation margin resulting from the stock trading ex-dividend by working with technical trades.

On the ex-dividend date, the gross dividend amount will be reduced from the previous day’s settlement price via the Price Correction Process. The “start of day position” of each client will be booked out at the original previous day settlement price and booked back in at the adjusted previous day settlement price. The resulting margin payments offset the impact of the dividend payment on the variation margin and ensures that the dividend-induced price move in the stock does not affect the value of open positions in the futures contract. As I said, we will use this method for regular dividends, not for special dividends as these will be accounted for via the R-dividend factor, in line with all other equity derivatives at Eurex.

We will also include our flexible futures service so that clients can chose their individual expiry date.

Who are the new futures designed for and why should they use them?

We see two main audiences for the new futures. Firstly, asset managers who are looking for leveraged equity replacements with the corresponding leverage. And secondly, for banks and treasury as an equity financing instrument.

There are equity financing agreements with and without dividend entitlement to the borrower. Our new Stock Tracking Futures can be used mainly for the latter. The buyer of the Stock Tracking Futures is solely exposed to the equity performance.

Users of this new product will enjoy the benefits of central clearing, which is very much supported by the regulatory environment of the last years.

Where do you go from here?

Depending on the success of the new futures, we will consider expanding the number of underlying stocks. Not just at the end of September, which sees the next regular review of the EURO STOXX 50 ®, but also to other heavily traded equity futures.


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