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Stuart Heath on our new Equity Total Return Futures

Release date: 08 Oct 2019 | Eurex Exchange, Eurex Clearing, Eurex Group

Stuart Heath on our new Equity Total Return Futures

On 7 October Eurex introduced Total Return Futures on single equities, complementing the Eurex suite of equity index derivatives and supporting the market in complying with new financial market legislation. We spoke to Stuart Heath, Eurex Equity & Index Product Development, about the new futures, how they benefit clients and how they push towards futurization.

Stuart Heath, Eurex Equity & Index Product DevelopmentZoom

Stuart Heath, Eurex Equity & Index
Product Development

What are Equity Total Return Futures?

Equity Total Return Futures are standardized futures contracts analogous to equity swaps. The buyer receives the total returns on the underlying reference equity and the seller receives the funding rate plus the negotiated spread on the underlying notional value. They can be used to hedge or generate a synthetic equity position. As futures they have standardized terms and features such as set maturity dates and positions are centrally cleared by Eurex Clearing.

What is being launched?

Eurex is listing contracts on 255 underlying euro-denominated reference equities. They constitute a large part of the component members of the EURO STOXX® Europe 600 Index containing companies from 11 eurozone countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The ETRFs launched cover most of the reference equities used as collateral and for financing trades in euro-denominated equities.

What are basket trades of ETRFs?

Basket trades allow market participants to construct portfolios using ETRFs to replicate a basket position in a set of underlying reference equities. The component parts have common features when traded, such as matching maturities and equal spreads. Subsequent trades can be made using the same basket ID to facilitate substitutions and amendments to positions held. This allows participants to use standard futures products as the basis to build customizable positions better reflecting their portfolios and requirements.

What benefits do market participants have beside a safe and regulated environment when trading on-exchange?

Eurex ETRFs, as with any listed futures, have transparent daily pricing and are centrally cleared with Eurex Clearing as the CCP. As a cleared product, ETRFs’ initial margin is managed using Eurex Clearing’s Prisma portfolio margining. This allows for cross margining efficiencies as they are in the same margin group as all of Eurex’s other equity and equity index futures and options (including the EURO STOXX® 50  Index Total Return Future). Valuations generated by price changes are netted and realized on a daily basis through variation margin. Basket trades (BTRF) provide transparent rights and parameters of substitution of ETRFs within a standard pre-defined framework. This allows traders to enter basket positions with certainty under Eurex’s rulebook.