Derivatives exchange of the year – Eurex

Eurex – the German-Swiss electronic derivatives exchange – has had a remarkable year, pulling ahead of all its competitors in volumes while rolling out new products and addressing clearing and settlement issues. In recognition of its success in these initiatives, Eurex is Risk’s derivatives exchange of the year.

Investors have certainly recognised its value: Eurex is now one of the main factors driving the stock valuation of its parent, the Deutsche Börse, according to Huw Van Steenis, executive director of European research at Morgan Stanley in London. In 2001, Eurex’s revenues grew by 68%; in the first three quarters of 2002 they rose by an additional 27%. The exchange now contributes more than one-fifth of its parent’s revenues.

This is largely due to the spectacular increase in derivatives trading volumes at Eurex. As of the end of November, it had traded more than 747 million contracts, up nearly 19% over the corresponding period in 2001. Its closest rival, pan-European exchange Euronext.liffe, saw total contract volumes increase by only 13%.

Some of Eurex’s bread-and-butter interest rate products continue to see double-digit growth. But the exchange’s equity products are really grabbing attention. For example, turnover in equity index derivatives shot up 58% in the year to end-November 2002 compared with the previous year. The exchange’s success story is its Dow Jones EuroStoxx futures and options – the volumes on these two contracts, driven mainly by a strong increase in their use by the international hedge fund community, were up 79% and 117%, respectively, January to November over the year-earlier period.

Eurex also has the Swiss Market Index contract for Swiss equities, while rival London International Financial Futures and Options Exchange (Liffe) has the Footsie contract for UK equities. Van Steenis says: “If the UK were to decide to join the euro, there would be a shift in the focus of what is the pan-European benchmark product.” Eurex’s two contracts give it a geographical diversity that Liffe’s London-focused contract does not have, which could appeal to risk managers seeking to hedge as much European equity exposure in one place as possible.

Eurex is now promoting sector-based pan-European equity index contracts, which it started to roll out in April 2002. Volumes have been building up solidly since the launch. Rudolf Ferscha, chief executive of Eurex, says: “Europe will be increasingly viewed as one investment zone, which is then sliced into different investment criteria, more by way of industry sectors than national boundaries.”

Eurex was the first to launch futures and options on exchange-traded funds Europe-wide last year. It wasn’t until December 2002 that Euronext.liffe announced its own plans for ETF options. But going forward, it is in single-stock options that Eurex will compete head-to-head with Euronext.liffe. “When you narrow it down, really the battle is on for the single-stock options products in Europe,” says Richard Berliand, head of exchange-traded products at JP Morgan Chase in London. “There is a lot to play for there.” Such options are used by a wide variety of end-users and traditionally have very strong volumes, but at the moment the playing field is roughly evenly split between Eurex and Euronext.liffe. The competition is heating up, though. Eurex rolled out 14 new Dutch options in 2002 in a bid to compete head-on with Euronext’s Amsterdam exchange, and observers expect Eurex to take on either the Italian or the Spanish derivatives exchanges for domestic single-stock options business in the next 18 months.

But Eurex isn’t just looking within the borders of Europe for its growth. The exchange renegotiated its troubled a/c/e-alliance joint venture with the Chicago Board of Trade in July. Under the new terms, Eurex will be allowed to launch new products and services in dollars, both within the US and worldwide, from 2004 onwards. Ferscha says: “We can enter into partnerships with people who trade dollar-denominated products, and we want to use this new-found freedom. We are in close conversations with clients and potential new clients both in the US and around the world, where there is demand for Eurex delivery in such products.” Morgan Stanley’s Van Steenis believes the exchange will opt for another alliance, or an outright acquisition, in the US to expand further.

The exchange is already beginning to dip its toe into US waters with new products, such as the Dow Jones Global Titans 50 futures. Ferscha points out that 25% of volumes in benchmark products originate in the US. And, since US exchanges have been reluctant to embrace electronic trading, Eurex may find an opening similar to the one they exploited in the late 1990s, when Liffe chose to initially stick by floor trading and Eurex managed to erode its rival’s market share in key contracts. “The move to electronic trading is the primary enabler for global roll out. If you are interested in global distribution, you have to develop electronic capabilities,” Ferscha says.

Eurex’s other big push is in clearing and settlement. Deutsche Börse purchased European clearing and settlement company Clearstream in March 2002. It has saved more than e50 million by combining Clearstream with existing operations. Its goal is to create an integrated European clearing and settlement platform for all types of securities. In fact, in March the exchange plans to roll out a central counterparty and clearing function for cash equities, to augment the services it already provides in the cash bonds, derivatives and repo markets for German and Swiss securities, Ferscha says.

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