Eurex Exchange went live on July 7 with FX futures and options that combine best-practice OTC market conventions with the transparency and minimised risk of exchange-traded and centrally cleared contracts.
Reny Morsch, Sales, Senior Vice President at Eurex, says that the derivatives exchange was prompted to develop FX futures and options contracts due to demand from its existing member base. European customers wanted to be able to trade FX on Eurex Exchange alongside other products with the exchange. Morsch says: “We had a prolonged consultation phase in which we discussed what these products should look like with both our members and buy-side customers. We wanted to create contracts that were useful to the market and not simply copy and paste other products that were available. We wanted to deliver something unique and develop new ways of helping firms conduct their business in this market.”
Contracts on offer
Eurex has initially launched six currency pairs on four major currencies (Euro, US dollar, British sterling and Swiss Franc), choosing the exact contracts that make up the lion’s share of trading in the OTC market. More currencies will follow depending on customer demand and the exchange is looking at NDFs and emerging market currencies.
The contracts have been designed specifically for spot traders and mimic OTC terms as far as possible rather than the inverse rate normally listed on derivatives exchanges. “We wanted to make it very easy for existing OTC business to move over to the exchange by building up on existing OTC standards,” Morsch adds.
Eurex has launched with a harmonised contract size, this is 100,000 of the base currency, across all currency pairs and not fully adopted decimalisation to offer half pip quotes. This memorable contract size is small enough to offer a relatively precise hedge as well as enabling a portfolio-based approach to hedging. Standard OTC forward expiry dates are also reflected in the exchange-traded contracts, so that the full month can be traded rather than the fixed expiry dates usually found in exchange-trading.
She adds: “Here again, is a feature that almost everyone told us they wanted – a physically settled contract, with settlement in CLS alongside all their OTC business.”
Another unique feature is that Eurex Clearing remains counterparty to the trade until the trade is settled in CLS, providing full counterparty risk protection as there is no splitting of the trades into bilateral trades after expiry. Eurex Clearing stays the counterparty throughout the life of the trade until it is settled providing a solution for customers looking to diversify their counterparty risk.
Eurex has also listed options on spot, which is also a unique feature as normally options are only listed on futures on derivatives exchanges. “It is a lot easier for them to use such an instrument because they do not need to worry about delivery of the future on expiry when they exercise an option as they get the currency payment they need,” she adds. Strike price intervals of 50 pips are being offered as standard but Morsch says that strike prices in between these intervals can be set-up for customers.
She says: “We have had a lot of interest in our FX options because they are on spot. This is also attractive for banks as a hedging instrument as well as providing a new market instrument for them.” Eurex is also offering Exchange for Physicals instruments that enable trades in the spot market to be transferred into an exchange contract.
Morsch believes that exchange-traded contracts will be used more and more due to the regulatory changes and because cross-margining, both with other asset classes as well as between listed and OTC instruments, will mean customers will significantly benefit in terms of cost reduction.