Next Generation ETD: a future-proof concept

In June, the infrastructure for Eurex’s next generation of exchange-traded derivatives (ETD) contracts went live. The concept meets changing market demand and is implemented across Eurex’s entire value chain, allowing more flexibility in the design of exchange-traded products in the trading, clearing, risk management and data areas. In this article, Philipp Schultze, head of equity and index sales, Emea, at Eurex, discusses the latest developments and future plans for this next-generation infrastructure

About Eurex

The implementation of next-generation exchange-traded derivatives (ETD) contracts aims to introduce a more flexible setup of ETD products. The new concept enhances contract identification and allows for more than one expiration per month on a product level (sub-monthly contracts).

The three business initiatives – integration of weekly contracts, volatility strategies and basis trading – are launched to attach the new flexibility in setting up ETD products with one big change. Further initiatives will follow in due course. We’re implementing this future-proof concept to stay best in class given the evolving market conditions.

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What is the NextGen ETD project’s current status?

We are approaching the finish line with our NextGen project activities. The big functional go-live on February 6, 2023, is only a few weeks away. From a technical perspective, we have already introduced all necessary changes in June this year with software releases for the trading, clearing, risk and market data systems. We are working closely with our customers, their customers and the vendors to support the necessary implementation and testing work on their side. While some issues are still to be addressed, good progress has been made over the past few months, and Eurex is looking forward to implementing a future-proof contracting logic that will enable a wide range of new product initiatives and trading strategies.

Philipp Schultze, Eurex

What were the biggest hurdles in the project and how did you overcome them?

NextGen ETD is designed to meet our customers’ demands for additional trading capabilities and more streamlined and direct processes. To enable this, significant and complex changes are required, with major implications for the entire listed derivatives industry. This calls for close alignment of timelines and implementation approaches to enable a common understanding and co-ordinated approach between customers, vendors, industry associations and Eurex. Flexibility, openness and the willingness of the various parties to jointly shape the future of the listed derivatives industry have proven to be one of the key success factors for the implementation of this initiative.

What aspects or features were most important to your customers when developing the new business initiatives?

All three business initiatives – the integration of weekly options, volatility trading for single-stock options and MSCI basis trading – began with a specific customer request. In the case of weekly options, for example, a long-standing request from our customers is to trade strategies, namely calendar spreads between the different weekly expiration dates. This has been implemented using the new contract logic. It will facilitate the execution of these strategy trades and minimise the execution risk for banks, brokers and end-customers.

For the second initiative – volatility trades in single-stock options – the operational step of bilaterally exchanging a cash underlying is a limiting factor for many participants. It requires not only additional operational steps, but a variety of administrative tasks such as know-your-customer processes and a regular review of counterparty risk limits. With the new functionality, participants will receive help to transfer this task to the clearing house and integrate it into Eurex’s trading process.

The same applies for MSCI basis trading, where the Market on Close T+x functionality will reduce the operational and manual process, minimise counterparty risk and, simultaneously, increase transparency of the fair value of the basis for the global MSCI offering.

Which future trends do you see in the new business initiatives?

Eurex is one of the leading exchanges in transferring over-the-counter (OTC) applications to a listed format, and the new contract logic will allow much greater flexibility in the design of listed contracts. An initial enhancement will be the offering of additional expiration dates within the week, such as Monday or Wednesday options, for key benchmark products. There is strong demand here for trading short-term options strategies or event-driven positioning.

A second initiative, daily expirations for physically settled single-stock futures, will enable many use cases in exchange of futures for physical trading. Numerous other potential use cases are conceivable. However, as in the past, we will carefully examine, together with our customers, how Eurex can improve current trading processes or bring OTC trading to the listed exchange.

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