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Three questions: Lee Bartholomew on Eurex Inter-Product Spreads

Release date: 19 Sep 2019 | Eurex Exchange, Eurex Clearing, Eurex Group

Three questions: Lee Bartholomew on Eurex Inter-Product Spreads

On 16 September 2019, Eurex launched Eurex Inter-Product Spreads. We spoke to Lee Bartholomew, Head of Fixed Income Product Design at Eurex about the new Fixed Income Futures combinations (Bund-Buxl Spread, Long-term BTP-Bund Spread and Schatz-Short-term BTP Spread). 

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Lee Bartholomew, Eurex’ Head of Fixed Income &
FX Product Research and Development

What exactly are Eurex Inter-Product Spreads

Our Inter-Product Spreads are used to trade exposure to changes in the flatness and steepness of the yield curve, such as a Bund-Buxl spread or outright spreads between European government bond futures such as the BTP-Bund spread. 

Spread products could previously be traded but there was not a dedicated central limit order book (CLOB) for BUND, BTP or Schatz spreads at Eurex. Today, in Europe, notable volume is still traded off book; we expect this enhanced functionality will further improve the liquidity picture and facilitate more migration of larger orders to the CLOB over time. 

What advantages do they have?

By standardizing these spreads into a dedicated CLOB, Eurex has created a duration neutral trading opportunity by using the appropriate leg ratios. As the spread is traded in a single transaction, it reduces the legging risk and helps to improve best execution. Once the Inter-Product Spread is processed, the spread is decomposed into its individual legs which the liquidity providers can trade out of in their respective CLOBs. 

There is a broad market desire to increase the use of electronic execution from both buy and sell side. This product enables trading on a spread basis, allowing clients access to a dedicated orderbook outside of the CLOB of the leg instruments, further facilitating electronic execution via algorithmic models. 

From an end client perspective it also draws in other liquidity providers that are not in particular outright products now. It affords the potential to enhance liquidity in periphery products versus core German benchmarks. 

Which clients will be interested in this product? 

We believe it appeals to the full ecosystem, to both buy- and sell side. It is interesting for all, from proprietary trading desks, the non-bank liquidity providers and the buy side with the hedge funds and real money managers. Overall it is something where the functionality helps to ease execution. If you look at the way the market is heading, we can offer functionality enhancements to streamline the workflow processes of trading desks that is a positive for all clients.