In a DerivSource commentary, Markus Schiller, project lead and Thomas Winter, head of Trading Design, discuss how Eurex is revolutionising its ETD infrastructure to build a scalable and future-proof platform capable of supporting the trading needs of today and tomorrow. They explore changes that enable initiatives that directly benefit both buy and sell-side market participants: better basis trading, delta neutral volatility strategies in single stock options and an improved setup for weekly options.
Eurex is changing the way it identifies Exchange Traded Derivatives (ETD) contracts or products from a month-year logic to a day-month-year logic. This profound, but timely infrastructure change allows for greater flexibility in product set up by enhancing contract identification to allow for more than one expiration per month on a product level and support future business initiatives. This change is analogous to Y2K, where everyone switched from two digits to four digits to represent the year at the turn of the millennium. It sounds simple at first glance, but it has far-reaching impacts on all the trading, clearing, risk and market data systems.
The infrastructure change impacts the whole value chain, as well as upstream and downstream systems, and affects all market participants on the buy and sell side. All trading participants, market makers, liquidity providers and clearing firms will have to adapt to this new logic that will be applied throughout Eurex’s entire ETD product range.
Eurex is rolling out three concrete business initiatives with this project: one is to enable basis trading for equity index futures; the second is the integration of weekly options into the main product (for equity index products, equity options and Bund Options); the third is to enable a delta neutral volatility strategy in single stock options. Eurex is currently carrying out a full scope simulation before rolling out technical releases in June 2022, and the new logic will become mandatory for all market participants for all ETD contracts in February 2023.
Drivers for the change
Previously, the month-year logic meant it was only possible to group contracts together that shared one expiration date per month. With the additional data gathered with the new day-month-year logic, it will be possible to have multiple expirations per month on derivatives product level.
Like other exchanges, Eurex has weekly expiring products, but if a client wants to roll a position from one weekly expiration to another, that currently cannot be done in one transaction—they have to close the position in one product and open a separate position in a different product, which introduces additional risks.
Introducing more than one expiration per month per product means Eurex will be able to support all these contracts within one product context. They can provide the corresponding standard option strategies to a roll position from one weekly expiration to another, because the expirations are now integrated in one product. Clients will be able to move positions in a single transaction, which was not possible before. This has a significant impact on position handling in the clearing area, reduces operational risk for transactions and enables new trading strategies.
Clients wanted to have a position rolling facility in options markets with one transaction for risk mitigation purposes. This is now enabled having several expirations per month.
Another advantage of this infrastructure change is that Eurex is establishing a consistent way of recognising contracts throughout its different systems. Currently, each system contains different fields. For example, the trading system contains a numerical contract ID that are not present on the clearing or the risk layer. Eurex harmonises the design across the board, which will be better for all participants.
Future proofing the infrastructure
Eurex’s Next Gen is a holistic solution that enables many different initiatives at once, as well as other future projects. This overhaul will make the whole system more consistent and flexible for future development.
In future, Next Gen will enable Eurex to offer more flexibility to the trading and clearing worlds, for example with daily expiring futures. Daily expiring futures will simplify basis trading for index futures as the daily expiring futures are very close to the underlying index. Combining the daily expiring futures’ closing price with the price for quarterly futures means firms can replicate basis trading using simple calendar spread trading.
It will also enable clients to roll over transactions made in the Over-the-Counter (OTC) market into the exchange environment, as well as many more initiatives to come.
Timeline
The transition will occur in February 2023 in a single day, requesting all participants to be ready for the day-month-year logic from this day onwards, much like during Y2K. Shortly afterwards, the first new business initiatives with daily and weekly expiring contracts will be introduced. It was agreed with market participants that this would be preferable to a longer transition period. Participants should have enough lead time to get ready for the change and to prepare their own clients which are only indirectly connected to Eurex to ensure their readiness.
*For more information on this structural change, please go here .
Contributors:
- Markus Schiller, project lead at Eurex
- Thomas Winter, head of Trading Design at Eurex
