Eurex is working with MSCI, provider of investment decision tools and services, to expand its total return futures (TRF) segment.
Eurex intends to launch TRF contracts on three MSCI indexes on 11 March 2024: MSCI World Index (TMWO), MSCI EAFE Index (TMFA) and MSCI Emerging Markets Index (TMEM).
This will be the first time TRFs on global indexes are offered, which are increasingly in demand by market participants, Eurex said. The TRFs will be denominated in USD. and the underlying benchmark US funding rate is SOFR (Secured Overnight Funding Rate). Eurex said the launch reflects Eurex’s commitment to provide solutions that support the global shift from swap instruments towards listed and centrally cleared derivatives.
For TRFs it is the introduction of a new product type that replicates OTC structures. In this case trading is conducted in a spread in basis points over the funding rate, as would be the case in the OTC instrument, making it much more relatable to those used to OTC instruments. Eurex then calculates the economic values of these spreads with other input parameters, such as index close, before transmission to the clearing house. In short, it trades like a swap but clears as a future.
For technical reasons, they will initially be available during US trading hours. The TRF product uses a funding rate, in this case for a USD denominated product Eurex uses the US Secured Overnight Funding Rate (SOFR) which is only published at 08:00 am Eastern Time by the New York Federal Reserve. Eurex will receive this at 14:00 CET to update the product parameters. Going forward the firm intends to offer an earlier session based on the ‘previous day’ US rate and will need to split the sessions technically. Expansion to European morning and Asian trading sessions is planned later in 2024.
Eurex executive board member Randolf Roth said: “Eurex reinforces its commitment and continues to lead in delivering innovative solutions that address increased capital requirements by offering important capital efficiencies to our sell-side and buy-side customers. We are pleased to work with MSCI to further strengthen and expand the TRF success story.”
George Harrington, managing director at MSCI, said: “We’re pleased to work with Eurex as they expand their TRF segment to include MSCI Indexes. This reflects the increasing demand for cleared and listed TRFs on global benchmarks, offering enhanced capital efficiencies to market participants.”
BASEL 3 and Uncleared Margin Requirements have brought many more counterparties into scope of bilateral margining for uncleared derivatives, and the potential need to implement complex margin methodology and calculations and potential renegotiation of bilateral agreements. This has therefore led to demand for cleared alternatives to OTC swap instruments.
Eurex launched the TRF segment in 2016 with the listing of the first Total Return Futures on the EURO STOXX 50 Index.
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