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From niche to mainstream – the growing market demand for listed derivatives (Part I)

Release date: 30 Jul 2020 | Eurex Exchange, Eurex Clearing, Eurex Group

From niche to mainstream – the growing market demand for listed derivatives (Part I)

In response to market demand, listed derivatives are getting more and more versatile in terms of products and functionality. We sat down for a two-piece interview with Megan Morgan, Global Head of Equity and Index Sales at Eurex, to get the background on the increasing diversity of products, users and applications.

Megan, how has the perception of listed derivatives changed over the years?
In the investment community, constant change is the only thing that stays the same. Five years ago, we were the least important person in the room at a buy-side conference. Now, in 2020, we gave the opening remarks at the same conference. The perception of listed derivatives is changing all over the world. The Eurex team is working closely with buy-side firms, and now, more so than ever, listed derivatives are becoming integrated into the investment process. 
We have a unique opportunity in terms of timing. While regulation is pushing more OTC trading towards the listed markets, investment managers are evolving. There is a constant search for new asset classes, new benchmarks, solutions to regulatory disruptions and trade process simplification. This search is finding its way to the listed market.

Exchanges seem all about futurization nowadays. Why is that?
Futurization has become a big buzz word in the equity space. But futurization is more than copying an OTC to a listed solution. When looking to convert equity and equity index swaps to the listed market, we found using a futures wrapper on an OTC swap best ensures the listed market. It also delivers the same risk profile and payout to the end-users. The benefit is that the result is not just a cleared swap. Futurized swaps have term structure, price discovery and standardization which has led to the emergence of new asset classes.

For Eurex, futurization itself is nothing new. Eurex launched Dividend Swaps in 2008 after the Lehman default. In the subsequent years, as counterparty risk became a deal-breaker, the dividend swap market moved to listed futures. The initial growth in the product came from "Alternative Risk Transfer" trading. The banks would offload their structured product risk, and the buy side would buy it at a discount in the futures market.  Thereafter, we saw growth come from term structure trading as multi-asset managers look to extract dividend risk premia along the ten-year curve. We will continue to build off this momentum by taking dividend as an asset class and expanding it globally through our MSCI franchise.

Are there any new products or asset classes in the pipeline?
Total Return Futures have been on an upward trajectory since inception in 2017. However, in the past year we have seen an influx of buy-side firms. Total Return Futures (TRFs) have a similar story to dividends. In 2008, the Lehman bankruptcy drove the dealers to the listed market, offloading their balance sheet risk. In 2017, it was Uncleared Margin Rules. And, just like Dividend Swaps, TRFs were first driven by alternative risk transfer trade.  However, we are just starting to see multi-asset managers expand into implied repo by trading along the term structure. We will use the Total Return Methodology on collateral indexes to create a simple, standardized solution for equity financing, and finally, similar to the dividends, expand the tradable implied repo concept globally through our MSCI franchise.

Additionally, we have recently seen regulatory disruption that is driving UCITs funds to the European markets for listed solutions.  The most evident is in our IGLN contract. We will continue to grow our ETN offering to ensure we are keeping pace with the changing regulatory landscape.

And, we also see a need to offer solutions for trades that stay in the OTC space merely for complexity reasons. We address this with Related Security Spread Futures and Equity Basket Trades (EBB) functionalities.


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