Eurex In Asia – A Success Story With Further Growth Potential

Eurex is continuously striving to extend its footprint in Asia. Recent examples are the extension of trading hours into the Asian time zone, a broad range of MSCI index derivatives on Asian underlyings and several co-operations. We talked to Michael Peters, CEO of Eurex, and Randolf Roth, Member of the Executive Board of Eurex responsible for Equity and Equity Index globally, about the strategic drivers behind this strong commitment to Asia.

 

Eurex is an exchange located in Europe. Nevertheless, Asia seems to play an important role in your growth plans?

Michael: Our engagement in and commitment to the Asia-Pacific region is driven by business opportunities in the derivatives market based on the dynamically developing Asian economies. Asia is expected to be on track to top 50 percent of global GDP by 2040. (Source: Bank of Asia Development). Eurex’s customers are looking for an extension of their financial exposure to the important Asian region and Asian investors would like to have access to European benchmark derivatives.

 

 

The extension of trading hours two years ago has further accelerated demand in Eurex benchmark derivatives and MSCI products. And due to regulatory developments, the demand in EUR swaps, NDF and Cross-currency swap clearing is also becoming more important for Asian institutions.

What do you consider your main strategic focus areas?

Michael: Our main objective is to constantly focus on the needs of our customers and current market developments. We have recognized three essential global trends in the financial markets, which hold also true for Asia: the shift from active to passive investments, from bilateral OTC trading to exchange traded and CCP cleared solutions, as well as the growing trend towards sustainable investing. In addition, there is also a demand for key benchmark products to be tradeable around the clock.

Sustainable or ESG investing is becoming especially prominent in Asia. Europe presently leads and paves the way forward here and, it seems that Asia is looking very closely at developments in Europe, for example the Green Deal, to then shape its ESG landscape accordingly.

What other Asia-specific challenges do you see?

Michael: Regulatory requirements are always a challenge and Asia comprises several different financial centers with equally different regulatory frameworks. Being a European exchange, we need to be recognized as an exchange and/or clearing house and be compliant with the different regulations in the respective countries. But we are pretty much covered here with all the relevant licenses for trading and clearing in place, or in the process for approval.

On the other hand, members located in Asia need to adhere to certain European regulations created to make the markets more transparent and to improve the protection for investors, such as MIFID/ MiFIR II. Here we have a dedicated client services team based in our Asian offices to assist our clients to navigate these necessary regulations.

What is also unique in the Asian financial market is the high percentage of retail participation in regulated and transparent derivatives markets. This means, it is crucial to educate the investors on the opportunities in euro denominated products.

You are currently extending the trading hours of further products into the Asian time zone. Does this mean the extension of your trading hours to cover the Asian time zone has been a success?

Randolf: By going from 14 to 21 hours for selected liquid futures in December 2018, we made Europe accessible for Asian investors. At the same time, we have significantly increased hedging and risk management capabilities for our global customer base.

The amount of liquidity we see during THX reflects investors’ needs: At the end of November 2020, trading during the Asian hours exceeded 20 million accumulated contracts. This resounding success encouraged us to introduce four additional products to the Asian time zone: 10-year Euro-OAT, EURO STOXX Banks Futures, STOXX 600 Futures and VSTOXX Futures which went live on 7 December.

 

 

You are currently experiencing increased volume in your MSCI segment. Which role do Asian underlyings play here?

Randolf: When it comes to MSCI products, Eurex is the #1 exchange globally by open interest with 2.7 million outstanding contracts, and a market share of approx. 47 percent. It is fair to say that Eurex MSCI derivatives are globally becoming an increasingly popular product.

On the Asian markets, Eurex has developed into the exchange of choice for trading of Asia Pacific MSCI derivatives. In total, 30 futures and options on MSCI Asia Pacific indices are listed on Eurex. November 2020 was our most successful non-roll month, mainly driven by trading on Asian underlyings that accounted for more than 50 percent of the total volume.

SGX’s delisting created a very competitive situation where Eurex was ready to offer the solution needed. Due to this stable and liquid offering on our platform, we naturally attracted the shift of MSCI Asia underlyings from SGX to Eurex. We see the highest activity to date during the ongoing December roll.

The global growth of the buy side is a major challenge but also an opportunity for exchanges worldwide. Which role does the buy side play for business development globally and specifically in Asia?

Michael: Indeed, buy-side flows have increased over recent years and now represent almost 22 percent of Eurex’s MSCI derivatives flow.

We see, for example, pension funds in Australia now starting to use Euro denominated derivatives, and more and more hedge funds are diversifying their portfolios into European assets. With Uncleared Margin Rules applying to much wider user groups over the next two years, we expect this trend will further accelerate.

As a European exchange with a global footprint, what unique benefits do you provide to Asian investors?

Randolf: We are a European exchange but a global marketplace. Close to 7000 registered traders from 350 members divided over 33 countries connect to our renowned trading (T7) and clearing (C7) platform. We provide investors access to the broadest spectrum of equity index derivatives. Our offering ranges from global benchmarks, such as MSCI World, MSCI Emerging Markets, to European and national indexes including DAX®, Mini-DAX®, SMI®, (EURO) STOXX® RDX® and KOSPI ®.

We are able to bring buyer and seller together wherever they are, irrespective of time zone and location and we also ensure that counterparty risk is mitigated via our CCP.

This is also one of the reasons behind the success of our MSCI franchise – we can connect counterparties from around the world to one another to facilitate their trades. Furthermore, Eurex’s portfolio margining methodology offers robust cross margining benefits thus reducing the cost of trading.

How important are co-operations with local Asian institutions?

Randolf: Co-operations with local Asian partners make sense as long as they address a market demand. In this context, I would like to mention our more than 10 years’ successful partnership between the Korean Exchange KRX and Eurex. This partnership provides access for trading and hedging to Eurex KOSPI Options and Mini-KOSPI Futures around the clock.

To date, our joint customers have traded over 254 million KOSPI Options. We look forward to expanding this strong partnership by adding KOSPI Futures and FX KRW/USD Futures to the KRX/ Eurex Link in Q1 2021.

Apart from the mentioned partnership format with a local Asian exchange, we also collaborate with key associations and organizations in the region, such as the International Institute of Green Finance (IIGF) in China and the Chinese data provider Wind.

Let's look at the future. How is Eurex further expanding its footprint in Asia?

Michael: The Asian region with its financial centers is one of the strongest performing financial markets globally. There is no doubt that we will strengthen and deepen our commitment there.  We have defined three pillars on which we would like to focus in 2021:

Pillar one is all about products and innovation. For example, extending further products into the Asian time zone and expanding products within our KRX/ Eurex link. In addition, we would like to address the retail demand for micro contracts.

Pillar two addresses co-operations and strategic partnerships such as with our joint venture partner CEINEX with a specific focus on China.

With the third pillar, we aim to extend our clearing services into the Asia-Pacific region, increasing our footprint in EUR OTC swap and FX clearing.

In summary, the Asia region is an important priority on the Eurex agenda and we will further extend our commitment by the implementation of the mentioned initiatives.