Eurex OTC Trade Facilities

Meeting the needs of the asset management industry

Eurex OTC Trade
Originally published in the September 2008 issue

Given the current turmoil in financial markets the greatest challenge currently facing the asset management industry is counterparty risk. The introduction of the UCITS III legislation, the growth of portable alpha investing and recently, extension (i.e. 13030) investing have all contributed to the huge growth in the use of derivatives by the fund management industry. The Eurex OTC Trade facilities meet the needs of asset managers by allowing the flexibility of customized offexchange trading in derivatives with the benefit of substantially reduced counterparty risk and standardized clearing and settlement through a central Clearing House – in both equity and fixed income derivative products – with the added benefit of margin offset between existing exchange-traded derivatives positions and the OTC derivative transactions bought on exchange.

Also, recent fee reductions for Eurex's OTC transactions have made the Exchange's OTC services extremely price competitive. Equally Eurex introduced a new OTC functionality and generally enhanced its OTC service offering. Due to the added benefits Eurex's OTC Trade volume has shown spectacular growth reaching a record high of 99,383,966 contracts in May 2008.


Eurex OTC Trade Product Offering

Eurex is providing an extensive range of OTC Trade facilities to meet the asset managers needs:

  • OTC Block Trade
  • OTC Flexible Futures and Options
  • Exchange for Physicals – EFPI and EFP Trades
  • Exchange for Swaps
  • Mulilateral Trade Registration

OTC Block Trade

Eurex's OTC Block Trade facility ('BTF') promotes maximum liquidity and trading flexibility for an asset manager, facilitating amongst others, portfolio overlay or GTAA strategies across European asset classes using Eurex products. The BTF allows market participants, to enter offexchange transactions in Eurex futures and options contracts and yet still have the transactions cleared by Eurex Clearing. The Exchange sets a minimum number of contracts for each specific product admitted to block-trading2. For example, Eurex Single Stock Futures and the new Dow Jones EURO STOXX 50® Index Dividend Futures have a minimum block trade limit of just one contract whereas Dow Jones EURO STOXX 50® Index Futures have a block trade limit of 1000 contracts. Option strategies or option volatility strategies using Eurex futures and options contracts can also use the BTF3.

The Eurex OTC Trade facilities are also very price competitive. Fee caps for block trades for equity options have recently been reduced by 50 percent to 75 percent and for Single Stock Futures by up to 83 percent.

Equity Options

  • Fee caps for OTC block trades will be reduced to EUR* 200 for A-account transactions in all equity options. That's a 50 percent reduction for German, Swiss and Scandinavian equity options.
  • Fee caps for OTC Block Trades on P-accounts will be reduced to EUR* 100 for all equity options, giving a reduction of 50 to 75 percent.

Single Stock Futures

  • Fees for order book trading will be reduced for all Single Stock Futures products to EUR* 0.20 per contract.
  • Fee caps for block trades will be reduced to EUR* 200 for all Single Stock Futures products, meaning a reduction of
  • 83 percent for Scandinavian products
  • 66 percent for futures on German and Swiss underlyings
  • 33 percent for most other Single Stock Futures

OTC Flexible Futures and Options

The Flexible Futures facility allows fund managers to customize their Eurex futures contracts in terms of:

  • Maturity – Participants of an OTC Flexible Futures trade can create their own maturity date for the transaction: dates can be as early as the next business day or as far out as the maturity for the most distant futures listed on Eurex.
  • Settlement – In most cases the ability to negotiate the terms of settlement for Single Stock Futures either cash settlement or physical delivery.

Whereas the Flexible Options facility4 allows asset managers to customized Eurex options contracts in terms of:

  • Exercise Price – The selected exercise price can be defined above the highest exercise price of the corresponding regular option series or may be the lowest exercise price that is LEPOs or somewhere in between. Maximum exercise prices for Flexible Options are limited to 2.5 times the highest available standard exercise price in the respective product.
  • Expiration Date – The expiration date can be any exchange day starting from the next business day until the longest currently active standard expiration date of the standard contract.
  • Exercise Style – American or European exercise can be selected.
  • Settlement – Cash or physical settlement

Exchange for Physicals (EFPI and EFP) and Exchange for Swaps (EFS)

The OTC EFPI and EFP functionalities5 allow for the simultaneous purchase (sale) of a Eurex equity index futures (EFPI) or Eurex fixed income futures (EFP) and sale (purchase) of qualifying cash equities or cash bonds whereas the EFS facility6 allows for the simultaneous purchase (sale) of a Eurex fixed income and sale (purchase) of a plain vanilla swap. To meet the needs of the asset management industry, the EFP and EFS Trade facilities were recently enhanced to include non-Eurex interest rate futures and duration weighted trades that is yield curve and barbell trades in the EFP functionality and interest rate swaptions in the EFS facility.

The asset manager is now able to trade, for example, Euro-Schatz versus Euro-Bund, a Euro- Bobl/Euro-Schatz/Euro-Bund barbell, EURIBOR Futures versus swaps and swaptions versus Euro- Bobl all off-exchange with the benefit of clearing the futures positions on exchange7.

Multilateral Trade Registration Facility

The innovative Multilateral Trade Registration (MTR) facility allows the entry of block trades with one buyer or seller and several counterparties – instead of entering separate bilateral block trades. For equity options the block trade applies to all partial trades entered via the MTR facility – a significant cost saving to the asset manager. Also, the MTR facility alleviates the administrative burden of dealing in derivatives by reducing the number of transactions the portfolio manager has to record.

More Benefits at Lower Risks

Trading via the Eurex OTC Trade functionalities means trading at low costs9 − recent fee reductions for OTC transactions have made the service extremely price competitive. Currently over 700 Eurex products are available for OTC trading. The Eurex OTC Trade facilities give the asset management industry the flexibility of trading in tailor-made off-exchange derivative products plus enabling them to enjoy the same benefits as on-exchange customers do: substantially reduced counterparty risk and standardized clearing and settlement processes. By entering their trades via the Eurex OTC Trade functionalities, asset managers have access to Eurex's state-of-art clearing services.

* For non EUR-denominated products, converted and rounded amounts in the perspective product currency apply