Eurex Expands into US Credit Futures Market, Offering Global Hedging Solutions

Eurex, the derivatives arm of Deutsche Börse, has made significant strides in expanding its credit index futures offerings, now catering to a global client base. The exchange has launched a suite of products, including Euro investment grade, Euro high yield, GBP corporates, and US dollar emerging market sovereigns, providing market participants with a comprehensive set of tools to manage their fixed income exposures.

Unlocking Opportunities in the Global Credit Futures Market

Pioneering a Global Credit Index Futures Ecosystem

Eurex's credit index futures have gained traction since their initial launch in September 2021, with the Euro investment grade contract leading the way. The standardized, exchange-traded contracts have allowed market participants to hedge or take synthetic exposures on Bloomberg fixed income indices, with the total notional volume reaching €26.7 billion as of August 2024.Eurex's team has worked diligently to build credibility with portfolio managers and portfolio construction teams, ensuring that the product meets their needs and requirements. The exchange's global approach has been a key differentiator, as Lee Bartholomew, the global head of fixed income and currencies product development at Eurex, explains: "We feel that we are first to have a global product. We have built up enough credibility with portfolio managers and portfolio construction teams that the product works and meets their needs and requirements."

Expanding the Credit Index Futures Offering

Eurex's credit index futures have since expanded beyond the Euro investment grade contract, with the introduction of Euro high yield, GBP corporates, and US dollar emerging market sovereigns. In September 2024, the credit index futures traded over 142,000 contracts, with 50,000 in the Euro high yield index futures alone.The exchange's decision to launch futures on the Bloomberg US corporate index and the Bloomberg US high yield liquid index on September 23, 2024, further solidified its commitment to providing a global product suite. Davide Masi, the fixed income ETD product design at Eurex, believes that this move will appeal to clients with global portfolios, who can now use the exchange's products to take either a long or short leveraged exposure on fixed income index benchmarks.

Optimizing Risk Management through Clearing and Margin Offsets

Eurex's Clearing Prisma risk management system offers significant portfolio margin savings for clients, allowing them to offset risks across different credit index futures contracts. For example, clients can be long Euro investment grade and short US dollar investment grade credit index futures, with a large part of the risk being offset, resulting in lower margins.Eurex is also working on further risk optimization by the end of the year, aiming to enable clients to offset interest rate risk exposure of credit index futures against the exchange's fixed income futures and options. This approach creates a compelling value proposition for clients, as Davide Masi explains: "We will deliver further risk optimization by the end of the year based on offsetting interest rate risk exposure of credit index futures against our fixed income futures and options, thereby creating a compelling value proposition for clients."

Addressing the Demand for Credit Derivatives

The demand for credit derivatives is driven by end-users, such as real money, multi-strategy asset managers and pension funds, who seek to allocate additional beta or hedge risks on a tactical basis. Umesh Gajria, the global head of index-linked products at Bloomberg Index Services Limited, highlights this trend, stating that "demand for credit derivatives is driven by the end user and real money, multi-strategy, asset managers and pension funds who want to allocate additional beta or hedge risks on a tactical basis."Eurex's team has done an excellent job in nurturing clients and building confidence among sell-side institutions, ensuring that listed credit products can complement the existing ecosystem. Lee Bartholomew believes that this approach has been crucial, as he states: "Davide and the team have done a great job nurturing clients and getting sell-side institutions confident that listed credit products can complement the existing ecosystem."

Embracing Electronification and Algorithmic Execution

Bartholomew foresees that foreign exchange and credit markets will increasingly adopt an equity-like model in terms of electronification, trading functionality, and algorithmic execution. He believes that this shift will create opportunities for exponential growth in credit index futures, particularly with the introduction of a US dollar product suite, which will help accelerate the adoption of Eurex's entire product offering.Masi echoes this sentiment, noting that the US dollar market appeals to a global client base, which widens Eurex's potential customer base. He expects the US dollar products to have a stronger growth trajectory than the European products over the longer term, as the US is a prime target market, and the exchange is also eyeing the Asia-Pacific region.

Exploring Options as a Natural Extension

Bartholomew sees the potential for Eurex to consider options as a natural extension of the credit index futures, once the products achieve critical mass. He believes that options will complement the existing product suite and work alongside Eurex's fixed income ETF options offerings.Bartholomew is excited about the team's ability to deliver further innovations in the next 12 to 18 months, stating: "They have done a brilliant job to get to where we are, and now the focus is on execution."

Expanding Access for US Introducing Brokers

In a significant move, Eurex has recently allowed US introducing brokers to become direct exchange members, enabling US market participants to access the European derivatives exchange for the full US trading day. This change follows the Commodity Futures Trading Commission's (CFTC) approval of final rules in July, which allowed CFTC-registered foreign boards of trade to give US introducing brokers direct access to their electronic trading systems.Robbert Booij, the chief executive of Eurex, emphasizes the importance of this development, stating: "Providing clients with easy access to our markets is a top priority for us. This latest move offers US market participants greater choice and will provide them with greater efficiency in terms of trading and risk management."This expanded access allows a wide range of European and global benchmark derivatives to be traded on the exchange until the end of the US trading day, including Eurex's flagship products such as the Euro STOXX 50, STOXX Europe 600, German Bond Futures, and a broad range of MSCI derivatives.