ANALYSIS: Euronext expects strong start with latest total return future
2nd December, 2024|Luke Jeffs
Euronext is confident of building early liquidity in its latest total return future (TRF) as the European group looks to leverage the backing of France’s two largest banks and Euronext’s existing TRF based on the main French blue-chip index.
This is Euronext’s second total return future, following the group’s CAC 40 TRF made available in late 2018.
Charlotte Alliot, the head of institutional derivatives at Euronext, said the French TRF has proved “one of the best product launches we’ve ever made” and is actively traded by banks and hedge funds.
She said: “TRFs in general are proving very popular in Europe. The FTSE MIB TRF is a natural development for us given the very strong client demand which came from the same firms that are active on the CAC TRF.”
The Euronext TRF hit a monthly record of 84,450 lots in February last year and surpassed 75,000 lots a month in January last year and November 2022, according to FOW Data.
Total return futures are an innovative exchange-traded version of the total return swap which have proved popular among hedge funds by replicating the performance of an index, including income, capital gains from dividends and overnight lending in the repo market.
The TRF is interesting because it can afford firms the exposure of the over-the-counter (OTC) swap but without the cost, which has increased over the years due to extra regulation of the OTC market.
Alliot said: “We have Societe Generale and BNP Paribas as market-makers and, having spoken to the other big banks, we are confident they will be able to give off-screen liquidity which is important because the TRFs in general trade mostly in blocks rather than on-screen.”
She added: “When you take into account the margin offsets with the related Euronext products, clients have a natural incentive to move their OTC positions to the listed environment. Like with the CAC TRF, we expect some volume in the early days.”
Euronext is confident the product will take-off but Alliot said there will likely be a period of adjustment.
“The clients on the FTSE MIB TRF are going to be more or less the same ones you see on the CAC TRF, however I think it’s a great move to make Italian investors more aware of the contract. The TRF is not much traded in Italy so there is potential there and this contract is a good step to onboarding these firms.”
She added: “We have to remember that TRFs are still fairly new and sophisticated products so we think the increasing number of hedge funds will be the early adopters and, as with other products, the more traditional asset managers will come later.”
Euronext has listed the product on its Paris-based derivatives exchange rather than in Milan, which allows margin offsets against the French TRF. “We did that because the Italian derivatives are not yet in the same segment of the clearing house. That will happen next year, but we didn’t want to wait until then to launch the FTSE MIB TRF,” said Alliot.
The combination of the Italian derivatives clearing book with the rest of Euronext’s derivatives will be the next step in the multi-year integration of Italian exchange group Borsa Italiana into the broader Euronext group.
Alliot said: “This [the TRF] was made possible by the full expansion of Euronext Clearing which has allowed us to start rolling out new products such as equity options contracts and the ability to block trade after the expiry.”
Alliot said: “On the equity derivatives side, we are eager to continue to develop our trading infrastructure so last month we released this ability to block trade after expiry on equity options and there are other things that will come next year. And, as was announced in our strategic plan, we are also working on our fixed income derivatives expansion.”
Asked about the prospect of more TRFs, Alliot said: “There’s not really an appetite for a TRF on the AEX so if we were to do another TRF in the future, it would be out of our local scope. We don’t exclude anything because we are eager to develop the franchise but we have not chosen what will be the next TRF.” AEX is the Dutch blue-chip index which trades on Euronext Amsterdam.
Euronext’s CAC 40 TRF volumes are lower this year than in 2023, with the group having traded 229,620 lots in the first ten months of 2024 compared to 374,820 contracts last year, which puts this year 38% lower than last year.
Alliot said: “Last year was a record year for the CAC TRF for many reasons including a lot of trading around dividends at the beginning of last year. This year, we had a good trend as there were good opportunities on the repo curve in the first half of the year. Things have been a bit less dynamic since then. Altogether, we are very confident the product will develop, it’s just a matter of trading environment and market conditions.”
