Part Two: Disruptive pioneer to global powerhouse – 25 years of Eurex

Continuing from the part part of the series published on Friday, Michael Peters, the chief executive officer of Eurex, and Erik Mueller, the chief executive officer of Eurex Clearing, discuss opportunities around new products

As well as the capital efficiency of trading futures rather than swaps, Eurex offered through its clearing house further savings as the dividend futures that reference Eurex’s key indices could be portfolio-margined against Eurex’s index futures.

“The dividend derivatives and the other index derivatives for the Dax, EURO STOXX and MSCI have high correlations, so this created cross-margin and capital efficiencies that you simply don’t have in the swaps markets, so clearing and portfolio risk margining became and is a key success factor.”

Peters added: “We have continued with total return futures, starting with EURO STOXX before extending that to the dividend index and the bank index, and in 2021 to FTSE. Today, approximately 90% of the inter-dealer market that was swap-traded is now cleared in our clearing house.”

Eurex launched in March 2021 a FTSE 100 future, option and total return future under an agreement with FTSE Russell, part of the LSE Group.

ICE, the home of FTSE 100 futures and options trading, did not launch its FTSE 100 TRF until November the following year.

Eurex has also established in the past decade a diversified MSCI index derivatives business.

Peters said: “With MSCI, where we started in 2013 and 2014, we are now the exchange with the largest offering of MSCI derivatives. That was the next natural step from a strategy point of view. We started with the domestic indices, extended to the European indices and then moved to offer global and regional indices. We have the broadest offering with more than 160 MSCI futures and 20 MSCI options. Almost 60% of the MSCI open interest globally is consolidated within Eurex Clearing, whereas contract wise, we trade about 27%.”

Eurex competes with ICE Futures Europe and Hong Kong Exchanges and Clearing in MSCI derivatives.

For Erik Mueller, the chief executive officer of Eurex Clearing, Lehman Brothers triggered a fundamental change in the trading industry that is still playing out today.

He said: “I saw Lehman as a treasurer for Deutsche Boerse Group as well as for the central counterparty and our Clearstream business. What we know is the futures markets worked very well, but what became obvious is that the OTC derivatives market was even larger than the listed derivatives market at that time and there were bilateral exposures between the major players that prompted regulators to install a neutral, independent, third-party to risk manage the relationships between clients in a standardised, transparent, and predictable way.

“In other words, it greatly enhanced the role of central counterparties (CCPs) but through indirect regulation related for example to the capital requirements for banks, this has led to a change in behaviour, and we are still in that process.”

Mueller, who has been the head of Eurex Clearing since 2016, said the reforms ushered in after Lehman have changed the focus of trading firms.

“It has prompted us to think the future is not so much about the latency race that was so predominant on the trading side, instead the future will be much more around excellence in risk management and the capabilities to portfolio margin and real-time risk manage.”

Eurex’s capital optimisation strategy relies on Prisma, a platform that calculates the risks across all derivatives markets cleared by Eurex. The technology, which Mueller said has been described by bank clients as “the gold standard for risk management in our industry”, is also marking an anniversary this year, its tenth.

Mueller said: “Prisma gave us the capability not only to portfolio margin but also around real-time risk management which for the daily expiry options is of crucial importance.”

Eurex launched on August 28 its first daily options contract, based on EURO STOXX blue chip index, and said in September it had traded about 10,000 lots a day over the first three weeks since launch.

Prisma is also integral to Eurex’s Euribor relaunch, which is, in turn, a key part of its broader Euro interest rates strategy. 

Mueller said: “Capital efficiency is well-established in the exchange-traded equity derivatives space but in the fixed income market, particularly as it pertains to the Euro, there is a highly fragmented landscape today.

“A client focused on European rates will likely have bunds with Eurex Clearing, interest rate swaps with LCH in London, the Euribor contracts with ICE in the UK, and that client will likely finance these transactions in a bilateral repo market.

“In a way, this represents the maximum inefficiency in a single currency so one of the key areas of investment for Eurex Clearing has been furthering the capabilities around an integrated value proposition for the Euro, which we have called the home of the Euro yield curve,” said Mueller.

Ahead of the relaunch of the Eurex Euribor contract slated for the last week of October, the exchange is signing up clients to its expanded partnership programme, an incentive scheme that was first used on the clearing of interest rate swaps (IRS).

Eurex said on September 12 it had 18 firms pledged to the programme including most of the world’s top investment banks.

Mueller said: “We have seen over the past year that the partnership programme in swaps is delivering success, so we are now at €32tn (£28tn) in notional outstanding, up from zero five years before.”

Eurex already has many of the components of a European interest rate ecosystem, which could make the inclusion of Euribor an attractive prospect for clients seeking margin savings.

He said: “We have the Bund, Bobl, Schatz as well as the OATs and BTPs, and the OTC IRS. Given the ongoing dissatisfaction among EU regulators that systemic risk resides in a third country, a situation which is not sustainable, they asked us to extend the partnership programme that we have successfully employed for interest rate swaps to the short-term interest rate (STIR) complex including ESTR and Euribor.”

The final part of the three part series will be published on October 3