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LONDON, July 3 (IFR) - Eurex plans to launch a new electronic price discovery service during the fourth quarter for derivatives trading, enabling clients that arrange large blocks off-exchange to comply with best execution and transparency requirements under MiFID II.
At the same time, the Deutsche Boerse-owned exchange is expanding its product range to include the first futures on a European corporate bond index.
Sweeping reform of Europe's securities and derivatives markets, which takes effect on January 3, 2018, will force more instruments into an exchange-like environment and introduce new reporting and execution requirements for trades that are bilaterally arranged on a request-for-quote basis.
Large and complex orders in listed futures and options markets are still agreed bilaterally over the phone and manually entered into Eurex's T7 Entry Service. According to Thomas Book, CEO of Eurex, demand has been growing for a fully automated RFQ service that improves efficiency by moving voice-brokered business closer to the electronic world for documentation purposes.
“Not everyone will trade in an open order book but people want to direct quotes to a certain number of brokers to increase the efficiency of price discovery for large blocks or strategies,” said Book. "An electronic execution platform makes it more efficient to get wider quotes and takes out the documentation and audit requirement, so it’s a cost saving for brokers and market-makers.”
The new service allows banks and brokers to selectively contact market-makers to request quotes to find a trading counterparty. Orders are then automatically transmitted to the exchange’s T7 entry service for exchange trade confirmation and post-trade processing, including clearing and settlement.
“This is an important extension of our Order Entry services. We address the need of our clients to move more voice-brokered activity into electronic execution,” said Book. “By extending the capability to off-exchange arrangements, it means that two counterparties no longer need to pick up the phone, but can request a quote directly through the platform.”
The platform provides a similar service to organised trading facilities – a new breed of execution platform stemming from MiFID II for over-the-counter swaps execution - though matching ultimately happens in the regulated exchange environment.
The exchange is finalising the RFQ service and plans to start simulation tests in September, with full launch expected before the year-end.
Eurex is also responding to wider investment trends with the launch of new hedging tools that include the first futures on corporate bond indices.
The contracts, which are scheduled to launch in September, reference the EuroStoxx 50 Corporate Bond index. The index tracks the performance of euro-denominated investment-grade bonds issued by constituents of the eurozone blue-chip equity benchmark.
The new contracts are the first to provide exchange-traded exposure to European corporate bonds and offer an alternative to over-the-counter credit default swaps on iTraxx Europe Main.
“A general trend towards passive products such as ETFs creates new hedging needs for asset managers,” said Book. ”Corporate bond futures address that need as it is a very transparent product that also has a very transparent index rule book on the back of it.”
The exchange is in advanced discussions with market-makers interested in providing liquidity for the products.
Fixed income investors have increasingly turned to exchange-traded funds to gain more liquid exposure to corporate bonds and at lower cost. Fixed income ETFs have attracted more than US$70bn so far this year, taking total assets in the products to US$685bn, according to data from BlackRock iShares.
At the same time, liquidity in corporate bond markets has plummeted since dealers reduced inventory in response to stringent Basel III capital requirements. Liquidity in CDS markets has also declined since the global financial crisis as many firms retracted, particularly on the buyside. Notional outstanding in CDS index products stands at US$4trn, down from a peak of US$25.8trn in 2007.
The corporate bond futures launch forms part of a wider bid by Eurex to become the biggest derivatives exchange for broad based indices. Earlier this year, it became the only exchange to offer futures and options on all major MSCI equity benchmarks after adding futures and options on the provider's EAFE index, which represents developed markets across Europe, Australasia and the Far East.
The exchange has also extended the maturity profile of Total Return Futures on the EuroStoxx 50, adding December expiries for years five to 10.
More than 137,000 TRF contracts with a notional value of €4.8bn have traded since launch earlier this year and open interest currently stands at €3.9bn. (Reporting by Helen Bartholomew)