Charlotte Alliot, Head of Institutional Derivatives at Euronext spoke to Best Execution about trading the Eurozone banking sector using derivatives.
Why did Euronext launch the Banks Index Future?
We are known as an exchange that works closely with our clients to meet their needs, as we demonstrated particularly during the Covid-19 crisis with the launch of quarterly maturities on our dividend futures. In 2020, we were approached by a group of market participants who wanted an alternative product with a fair cost structure to trade the Eurozone banking sector using derivatives. We needed an index that was highly correlated with low tracking error, and having conducted simulations and back- testing, we submitted it to our partners for feedback and validation.
What are the key advantages of the new contract?
There are a number of advantages to the new contract. Key is the on-screen liquidity provided by five market makers – BNP Paribas, DRW, Flow Traders, Societe Generale and Tower Research – who are committed to the success of this initiative. The futures contract has been live since 7 May, and is quoting most of the day at 1 tick since then, which is quite unusual for a new product in such a short timeframe. This definitely illustrates the strong support of the liquidity providers.
There is also off-screen liquidity offered by all the existing main counterparties. To facilitate access to block trading, we have put in place a low minimum block of 3 lots which we hope will make it more accessible to investors.
Market players also said they wanted a higher contract size than was previously available, so the Euronext Eurozone Banks Index Future has a nominal value that is five times larger than the current market alternative. Having a higher nominal value per contract is designed to offer investors economies of scale at the clearing level.
But most importantly, in addition to the higher nominal value, the pricing of the futures contract is extremely competitive. In fact, our contract is approximately 75% cheaper. We decided to apply a pricing which is in line with the nominal value of the contract when you compare to the other Euronext benchmarks. This combination of higher nominal value and lower exchange fees has been extremely well received by clients, and is in line with what we have already implemented on our dividend futures.
Do you plan to develop other products on the Euronext Eurozone Banks Index? What about other derivatives projects?
First, it is important to mention we are quite happy with the Banks index future contract launch, as there was a regular trading of the contract and open interest has been progressively growing. We intend to launch additional contracts on the Euronext Eurozone Banks Index later this year.
We also plan to introduce an option on our Euronext Eurozone ESG Large 80 Index (ESG80) to further strengthen our ESG offering, alongside the existing futures contract. This will provide investors with effective hedging tools while offering the opportunity for exposure in the Eurozone sustainable economy. Investors will also be able to benefit from clearing efficiencies at the portfolio level. The ESG80 index is gaining traction, particularly on retail products launched by BNP Paribas in France.
The Euronext group recently acquired Borsa Italiana. How is the integration strengthening the Euronext derivatives franchise?
We see the acquisition of Borsa Italiana, which was completed in April, as transformational. It creates a leading pan-European market infrastructure and venue in Europe for listing and secondary markets for both debt and equity financing. Borsa Italiana has a very strong derivatives business with both an institutional and a retail client base. This enriches our offering and we look forward to working with our Borsa Italiana group colleagues to develop further innovation and even greater efficiencies to our clients.
What impact has the pandemic had?
In many ways we continued to operate our business as we always have. We work closely with market participants to find solutions and to design the market together. We want to develop value- added solutions with a fair cost structure. It is a competitive environment, but people know that we are flexible, approachable and open to innovative ideas that meet client requirements.|
For example, last year because of the Covid-19 crisis, the market saw cancellations and postponements of already announced dividend distributions. We were the only venue able to provide the necessary hedging tool in difficult conditions.
Since Euronext’s single stock dividend futures were previously only available in yearly maturities, which meant they only covered the risk on a full-year basis, we responded by implementing a shorter maturity cycle. We continued throughout the year to roll out these maturities in line with client demand to allow traders, brokers and asset managers to hedge their dividend exposure in extreme market conditions. We are proud of this flexibility, and proud to have been able to help market participants with adapted instruments with a fair cost structure.
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