In a significant move aimed at expanding its reach in the global derivatives market, Eurex has recently made strides in credit index futures, particularly targeting US and global investors. Here’s a detailed look at the developments and their implications:
Expansion into the US Market
In September 2024, Eurex opened its doors to US introducing brokers, allowing them to become direct exchange members. This change enables US market participants to trade on Eurex during the full US trading day, enhancing accessibility to European derivatives.
Previously, Eurex could only provide access to introducing brokers outside the US, which limited participation, especially after European markets closed. This adjustment follows the Commodity Futures Trading Commission’s (CFTC) approval of rules that permit CFTC-registered foreign boards of trade to offer US introducing brokers direct access to their electronic trading systems.
Growth of Credit Index Futures
Eurex launched its credit index futures in September 2021, starting with a Euro investment-grade contract. These standardized, exchange-traded contracts allow market participants to hedge or take synthetic positions on a Bloomberg fixed income index. As of August 2024, the total notional volume traded reached an impressive €26.7 billion.
Following the initial success, Eurex expanded its offerings to include Euro high yield, GBP corporates, and US dollar emerging market sovereigns. In September 2024 alone, over 142,000 contracts were traded, with 50,000 in Euro high yield index futures.
Lee Bartholomew, Eurex’s Global Head of Fixed Income and Currencies Product Development, noted the excitement around this nascent market, emphasizing Eurex’s credibility with portfolio managers. He stated, “We feel that we are first to have a global product that meets clients’ needs.”
New Product Launches
On September 23, 2024, Eurex launched futures on the Bloomberg US Corporate Index and the Bloomberg US High Yield Liquid Index, further solidifying its position in the credit derivatives market. Davide Masi, Fixed Income ETD Product Design at Eurex, anticipates that clients with global portfolios will increasingly utilize this global product suite for leveraged exposure to fixed income index benchmarks.
The Eurex Clearing Prisma risk management system allows market participants to gain substantial portfolio margin savings by offsetting risks between various contracts. For example, clients can be long in Euro investment-grade futures while shorting US dollar investment-grade futures, significantly reducing the risk and margin requirements.
Competitive Landscape
Eurex’s approach positions it favorably against competitors like CME Group, which launched US credit futures in June 2024. CME Group reported trading 415 contracts in the first week of its launch, aiming to help participants manage duration risk via intercommodity spreads with US Treasury futures.
While CME Group’s offerings are attractive, Bartholomew argues that Eurex remains the leading exchange in credit futures, highlighting its volume and open interest. He stated, “We are the incumbent exchange with regards to volume and open interest.”
Future Prospects
Bartholomew sees significant potential for growth in credit index futures, especially with the introduction of a US dollar product suite. He mentioned that US dollar products are expected to have a stronger growth trajectory than their European counterparts over the long term. The expansion into Asia Pacific markets is also on Eurex’s radar.
Furthermore, the potential for options on credit index futures is being considered as a natural extension, which could enhance Eurex’s existing product offerings and work alongside fixed income ETF options.
Conclusion
Eurex’s strategic initiatives reflect its commitment to global growth and its adaptability in an evolving market. By enabling US introducing brokers and launching new credit index futures products, Eurex is positioning itself as a key player in the derivatives market, meeting the demands of institutional investors and paving the way for future innovations. As the landscape for credit derivatives continues to evolve, Eurex is well-prepared to capitalize on emerging opportunities and enhance its product offerings for a diverse clientele.
