In a Q&A with DerivSource, Ade Cordell, President of Cboe NL – the Dutch exchange which is home to Cboe Europe Derivatives (CEDX) – and Cécile Nagel, President of EuroCCP – CEDX’s clearing provider – explain why the timing is perfect for the launch of a new derivatives marketplace in Europe and how CEDX’s modern platform will drive growth among European investors, market makers and the wider equity derivatives market on the continent.
Q. CEDX successfully launched last month (6 September). Ade, can you explain what Cboe’s main motivations were for launching a brand-new exchange for Europe’s equity derivatives market? What were the drivers and opportunities identified?
A. Firstly, CEDX is a key element of Cboe’s global growth ambitions and commitment to becoming the world’s leading derivatives and securities trading network. By bringing our proven products, innovative mindset and world-class technology to new markets around the world, we can provide a consistent and more valuable investing experience for our global customer base.
Specifically, CEDX was driven by our belief that Europe’s equity derivatives market could be enhanced by combining our US derivatives expertise, European equities footprint and ownership of EuroCCP – a leading pan-European equities clearing house – to create a new offering. Taken together, these elements have enabled us to bring an on-screen market structure for equity derivatives that more closely resembles the vibrant US model to Europe, which both new and existing market participants have been asking for.
Q. Cécile, what was the attraction to EuroCCP of supporting CEDX and clearing equity derivatives?
A. EuroCCP had been looking to diversify beyond cash equities clearing for some time. Our acquisition by Cboe in July 2020 was the catalyst needed for this to happen, meaning they could prioritise and direct the development of clearing capabilities to support the launch of CEDX. Equity derivatives is as a natural expansion of EuroCCP’s pan-European cash equities business and an opportunity for us to continue our journey to become a leading multi-asset class clearing house. We are delighted to be supporting a new and innovative marketplace and are committed to providing participants with a best-in-class service for the clearing and efficient margining of European equity derivatives.
Q. Ade, how is CEDX different from other derivatives exchanges? You say it will be similar to the US model based on ‘on-screen’ modern market structures. Can you explain the differences and benefits of these differences or differing approach?
A. Europe’s equity derivatives market is currently highly fragmented along national boundaries, meaning participants have to connect to multiple domestic exchanges and clearing houses to manage their exposures. CEDX has been designed from a pan-European point of view, enabling participants to access a modern derivatives market through a single access point.
The pre-dominance of a pre-arranged block trading model in European equity derivatives has also resulted in limited on-screen liquidity and stunted growth of the European market. Against this backdrop, CEDX facilitates access to both US-style on-screen liquidity and off-exchange block transactions. A transparent, lit, quote-driven market sits at the core of the exchange, with attractive liquidity incentive schemes and in-built market-maker protections, to ensure effective liquidity provision.
Our aim is to promote on-screen liquidity to help attract new sources of order flow to Europe, from both US participants accustomed to trading listed options in their home market and European clients that value an electronic on-screen model. This will create trading opportunities for both new and existing participants.
The design of CEDX’s product suite is also unique and based on feedback from market participants on what improvements they’d like to see to current index products. CEDX is initially offering trading in futures and options based on six Cboe Europe Indices: the Cboe Eurozone 50; Cboe UK 100; Cboe Netherlands 25; Cboe Switzerland 20; Cboe Germany 40; and Cboe France 40. These are proprietary Cboe indices all constructed using Cboe Europe market data, utilising the same methodology and ground rules as one another. Having this uniformity of index construction is important to market participants as it ensures they do not have to decipher multiple sets of index ground rules to understand how the indices are constructed. Furthermore, from a contract design standpoint, we worked with market participants to ensure their feedback was reflected in our contract design, this means the index futures and options are right-sized with appropriately calibrated tick sizes. Our goal, and our day one supporters’ objectives have been to develop deep pools of liquidity over time for this new European venue.
Q. Cécile, CEDX promises greater efficiencies among the trading and clearing of trades due to the single access point for market participants. Can you explain these benefits or efficiencies? Is this cost or operational efficiency or both?
A. The pan-European nature of CEDX’s model has inherent operational efficiencies associated with it, by allowing market participants to use a single marketplace for all of their European equity index exposures, compared to having to connect to multiple domestic venues and clearing houses currently. This helps create meaningful efficiencies in trading and clearing. We are looking to replicate what we achieved in European cash equities over the past 10 or more so years in equity derivatives.
From a clearing perspective, EuroCCP has developed a leading risk management model for equity derivatives, building on its recently upgraded cash equities margin model and risk system. The model provides for efficient cross-margining across CEDX’s European futures and options products. EuroCCP will operate a single default fund covering cash and derivatives with prioritisation rules in the default waterfall to protect clearing members active in a single asset class. The risk model and its key features was designed in close consultation with market participants
Q. Ade, now that you’ve launched, what are the next main steps you plan to take to further the evolution and growth of CEDX? For instance, you mention expanding to include more single country products and pan European futures and options in the press release. Can you share more about your 6 month and 12 months plans? Also, what are your expectations for greater involvement among more market makers?
A. As with the launch of any new market, our sole focus initially has been on a smooth go-live from a technical and operational standpoint and we have been very pleased with our progress to date. It has been a significant achievement to bring to life a brand-new exchange, clearing service and product suite in one swoop. The first month has shown us that everything works as intended and we are now focused on growing volumes with our launch participants, which includes banks, clearing firms, market makers and proprietary trading firms. We are also excited to be working with a second phase of participants who we expect to join CEDX later this year. We are putting in place plans for our phase two products, including further single country index futures and options contracts, before bringing single stock products on stream at a later date.
Q. Cécile, how do you see CEDX supporting the evolution of the European derivatives market in the long run?
A. We are very excited by the future prospects for CEDX and the market overall. We believe CEDX complements the existing market structure, brings much-needed competition to Europe’s derivatives landscape, creates meaningful efficiencies in trading and clearing and – by being attractive to new and existing participants – creates new investing opportunities for all participants.
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