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Equity Index Highlights - June 2018 edition

Release date: 15 Jun 2018 | Eurex Exchange

Equity Index Highlights - June 2018 edition

Market briefing

The result of the Italian elections dominated the headlines in May and drove volatility substantially higher. However, more recently, markets have rebounded as new finance minister Giovanni Tria ruled out Italy’s exit from the Eurozone. Recurring geopolitical topics like the U.S.-North Korean diplomatic relations and escalating tensions over protectionism means market participants remain cautious. Expectations for the U.S. Federal Reserve to lift interest rates again is hitting several EM currency pairs and consequently, Eurex has seen a jump in MSCI EM Index Options hedging for May. Eurex is the only exchange offering both liquid MSCI EM Futures and Options in combination. 

Another volume highlight has been the continued strength across our index dividend derivatives: ADV of almost 25,000 for our EURO STOXX 50® Index Dividend Future is up 27 percent year-to-date, options volumes are also higher on significant ADV growth to almost 9,000 contracts up 71 percent year-to-date. The EURO STOXX 50 Index Dividend points term structure indicates that yields remain flat for the next three years, it appears that we may be at a turning point with more demand for longer dated puts apparent. This has fed through to single name dividend futures with Italian companies: Intesa Sanpaolo and ENEL registering notable volume increases. 

As market participants look for signals to determine direction, one new visible source that could provide some insight is the equity repo pricing derived from our Total Return Futures Contract. Here, we have seen a gradual increase in the repo rate over the last few months – particularly prominent for the September and December 2018 expiries. This could be symptomatic of less stress on bank balance sheets, or of increasing stock borrowing costs for European large caps. It remains to be seen if this results in actual utilisation and new short positioning. 

There have also been concerns expressed around the ability for markets to function and provide liquidity under stressed conditions. This ability may be put to the test soon regarding reactions to the ECB’s potential scale-back or unwinding of asset purchases. At Eurex, we focus on fostering markets with high liquidity and providing price transparency. One such effort is Eurex EnLight, our new request-for-quote (RFQ) platform. It provides a valuable tool for clients to access a broad pool of liquidity providers and to execute large order flows. 

Zubin Ramdarshan, Head of Equity and Index Product Research & Development 

Facts & figures

 

Product news 

 

Eurex starts to extend the product coverage of its electronic request-for-quote (RFQ) service Eurex EnLight into the equity derivatives space by offering equity and equity index derivatives on Swiss underlyings from 19 June 2018 onwards. 

Eurex EnLight allows Eurex members to selectively engage with each other to request quotes and to safely negotiate bilateral and multilateral off-book trades. Our fully automated solution facilitates current practices of the voice brokered market, while providing users with the advantages of electronic data collection and the possibility to timely as well as efficiently retrieve all price formation relevant data of concluded deals. The electronic price and liquidity discovery service benefits brokers, banks and market makers alike to meet best execution requirements. 

The extension of product scope was preceded by three multi-member simulation days, during which interested members extensively tested the service; several simulation deals were concluded. Market makers and banks, representing half of the Swiss market segment, have participated in the Eurex EnLight simulation days and have supported the launch of the service for equities derivatives. 

Any member interested to be added to the white list of potential responders for RFQs in Swiss equity derivatives, is invited to contact Eurex via e-mail at EnLight_Improve@deutsche-boerse.com, indicating respective trader IDs and product groups they want to be added for. 

We will continue the extension of Eurex EnLight into the equities derivatives space. Details and future timelines will be communicated in due time. 

 

Eurex Exchange is the European leader for sector-based products. Sector index derivatives compliment exchange-traded products that deliver exposure to price movements of entire sector indexes. The high demand from market participants for sector index products stems from the increasing use of trading strategies that focus on individual sectors. Read more on how our clients can target their hedges and be ready for developments in any sector.
 
Dividend products in May

 

In the current market environment, investing in dividends continues to remain attractive. Dividend derivatives are the perfect instrument for any investor to manage and hedge their dividend exposure. As low-volatility instruments, they enable investors to take positions without necessarily exposing themselves to the market fluctuations of the underlying stock itself.
We have been seeing a strong growth trend in our Single Stock Dividend Futures since the beginning of this year. Over 600,000 Single Stock Dividend Futures contracts have been traded in May 2018, which is marking the second most active month ever (after 660,455 traded contracts in February 2018). In total, more than 2.5 million Single Stock Dividend Futures contracts were traded. The other dividend derivatives have been showing a very positive development as well. With regard to the EURO STOXX® Banks Dividend Futures (FEBD), we could observe increased activity, this also leading to a record open interest of almost 50,000 contracts. EURO STOXX 50® Index Dividend Options (OEXD) have seen a very healthy growth in 2018 with already approximately 950,000 traded contracts, reaching an open interest of 1.5 million contracts. 218,000 contracts have been traded in May - a record volume for this year.

Introduction of options on the EURO STOXX 50 Index with month-end expiration 

The new options on EURO STOXX 50® with month-end expiration (OESX-MEEx) will be introduced on 9 July 2018. Eurex will offer options with month-end expiration, i.e. they will expire on the last day of each expiration month. Look forward to more hedging opportunities!

For the volatility asset class products, the year 2018 to date has been interesting: in February, the CBOE Volatility Index (VIX) surged 115.6 percent, its largest one-day rise on record as panic selling hit the U.S. stock market. On 6 February 2018, the European markets sank and the region?s equivalent to the VIX - VSTOXX® - followed suit with its biggest one-day surge since the attacks on 11 September in 2001. 
Since their introduction fourteen years ago, the volatility asset products have significantly increased in trading and popularity. This includes the Eurex VSTOXX® products. For this reason, we thought it useful to have a question and answer session with Marshall Gause and Roxanne Bennett of Geneva Fund Partners, LLC - an investment advisor that specializes in trading the defined risk volatility asset class products and equity index arbitrage. Read more.

Selective RFQ: Voice Bridging E-Trading Part 2 - Why selective RFQ?

 

MiFID II and associated compliance have been a catalyst for change as new rules are causing a shift in the way global market participants assess and track their executions. The ability to preserve key elements of the OTC trading workflow while leveraging the benefits of electronic price formation is becoming more and more important.

TABB Group published a market note on the innovative selective RFQ approach, citing Eurex EnLight as a prime example of merging old and new trading paradigms.

Read more on how Eurex EnLight enables you to meet both the best execution obligations as well as the challenge of committing capital on an automated basis.

Events

Derivatives Forum in Frankfurt: 130 interested participants attended

 

Representatives from the buy- and sell-side attended the Derivatives Forum in Frankfurt, where Katja Dofel, well-known German TV host, guided everybody through a series of panels and presentations. Topics covered included artificial intelligence, machine learning, the future impact of blockchain technology and the opportunities that will arise from Brexit. Read more.

Registration is now on: Derivatives Forum in Paris and Amsterdam

 

This year's annual Derivatives Forum will focus on the key issues that will shape the derivatives industry of the future - including product innovation across asset classes, fintech, and geopolitical issues such as Brexit - and assess how ready market participants are to face the challenges and opportunities that lie ahead. Registration opens for Paris and Amsterdam now.


To learn more about our products and services, please do not hesitate to contact your local Sales representative, visit our website or follow us on Twitter @eurexgroup and LinkedIn.

 

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