Eurex's Credit Index Futures: Revolutionizing the Fixed Income Landscape

Davide Masi, fixed income and currencies product manager, and Vassily Pascalis, senior vice president, fixed income sales, discuss the development of Eurex's Credit Index Futures and the opportunities they present for firms across the global market.

Unlocking New Frontiers in Fixed Income Trading

Expanding the Credit Derivatives Ecosystem

Eurex's foray into the credit derivatives market has been a game-changer, with the launch of its Credit Index Futures in 2021. These innovative products have provided investors with a new way to gain exposure to corporate bond indices, offering both long and short positions through a futures contract. The initial EURO Investment Grade contract has since expanded to include EURO High Yield, GBP Corporate, USD Emerging Market Sovereign, and now the highly anticipated USD Investment Grade and USD High Yield Index futures.The introduction of these Credit Index Futures has disrupted the traditional landscape, offering a more transparent and operationally efficient alternative to existing instruments like credit default swaps (CDS) and total return swaps. Masi explains, "The main difference is that total return swaps are bilaterally traded and uncleared, while Credit Index Futures are cleared at Eurex Clearing and provide investors with full price transparency via Eurex's orderbook. Additionally, they are marked-to-market daily, which ensures that our investors have clear visibility on the profit and loss (P&L) of their positions."

Bridging the Gap Between Cash and Synthetic Exposures

Eurex's Credit Index Futures have also emerged as a compelling option for investors seeking to gain exposure to fixed income benchmarks. Pascalis highlights the key distinctions between these futures and other investment tools, such as fixed income ETFs: "Fixed income ETFs, like Credit Index Futures, are an exchange-traded product featuring deep liquidity both on and off-book. The greatest difference lies in that they are physical securities and therefore they do not offer leverage. Credit Index Futures provide investors with a way to get efficient and leveraged exposure and are therefore operationally easier to use to take a leveraged long (or short) exposure."The flexibility and leverage offered by Credit Index Futures have been particularly appealing to a diverse range of market participants, from asset managers seeking synthetic long exposures to relative value hedge funds and CTAs looking to deploy their strategies across a broader universe of fixed income indices.

Driving the Electronification of Fixed Income Markets

The launch and rapid growth of Eurex's Credit Index Futures have been fueled by several key trends in the fixed income market. Masi highlights the importance of the electronification trend in the underlying corporate bond market, which has unlocked deep liquidity pools and attracted electronic liquidity providers. This, combined with the growth of the fixed income ETF market, has enabled market makers to develop the technology to efficiently price and trade these complex, index-based instruments.Equally crucial has been the surge in demand from the buy-side, as investors recognized the potential of Credit Index Futures to gain exposure to an asset class that was previously inaccessible in an exchange-traded environment. The improved ability of sell-side institutions to offer and price these products has also been a significant driver of growth.

Expanding the Global Reach of Credit Derivatives

Eurex's decision to expand its Credit Index Futures offering to include global benchmarks, such as US and Emerging Markets credit, was a strategic move to cater to the evolving needs of its diverse client base. Masi explains, "Our objective since we launched the first Credit Index Futures was to create a market for our customer base to invest into global fixed income benchmarks. This year's inclusion of Emerging Markets and US Credit Index futures was the logical next step for us."The global expansion of the product suite has been well-received by Eurex's clients, who have embraced the opportunity to access a wider range of fixed income markets in a transparent and efficient manner. Pascalis notes that the new contracts have allowed non-bank sell-side institutions to participate in the credit derivatives markets, alongside traditional bank dealers, further broadening the ecosystem.

Fostering Liquidity and Adoption

As the Credit Index Futures have become more established, the liquidity profile of the contracts has evolved. Masi explains that while the initial focus was on off-book trading, there has been a growing interest in order book trading as the products have gained wider adoption. Pascalis sees this as a natural progression, stating, "It is a sign of growing maturity for a product to be traded in a more balanced way across the order book and off-book. In the early days, especially for a new asset class, it is common that the majority of trading happens in blocks and then once liquidity and adoption grows, trading moves more into the order book."Looking ahead, Eurex's Credit Index Futures are poised to attract a diverse range of market participants, from asset managers seeking synthetic long exposures to relative value hedge funds and CTAs looking to leverage the new opportunities in the fixed income space. Pascalis envisions a bright future for the product suite, stating, "We expect more relative value hedge funds to trade the product, taking advantage of the opportunities arising from this new asset class. CTAs are also able to deploy their strategies across a universe of fixed income indices using futures."As Eurex continues to listen to its clients and respond to their evolving needs, the future of Credit Index Futures looks increasingly promising. Masi concludes, "We will keep listening to them to define together the path forward in our journey to create efficient financial markets."