Euronext Automates Exchange for Physicals on Index Futures

Terry Flanagan

Euronext will launch a platform next year which it said will be the first from an exchange to provide centrally cleared trading of exchange for physicals (EFP) on index futures.

The EFP service will initially be available on CAC 40 Index Futures, the French blue-chip index, and AEX-Index Futures, which includes the 25 most actively traded Dutch companies on NYSE Euronext Amsterdam.

It is possible that the service could be extended to other index futures as the exchange, owned by IntercontinentalExchange, operates Smartpool, a dark pool where non-Euronext listed stocks can be traded.

The new platform is scheduled to launch in the first quarter of 2015.

Alicia Suminski, head of market and product development, European equity cash and derivatives at Euronext told Markets Media: “The test platform will launch in November to give market participants time to build connections.”

The EFP platform gives clients the ability to trade CAC 40 and AEX-Index Futures automatically against their respective 40 and 25 index constituents.

EFPs on index futures are traded on the difference between the index futures price and the spot price of the index. The new facility will allow EFP transactions on Euronext’s Universal Trading Platform via the derivative central order book with a trade in index futures contracts simultaneously against the corresponding basket of shares on Euronext’s regulated cash markets.

“Brokers currently have to calculate the amount of shares for each index constituent, which can generate execution risk, but our new platform automatically calculates the amount of underlying shares avoiding all errors,” added Suminski.

In February this year rival CME Group fined nine traders and clearing members for violating rules in trades involving Exchange for Related Position transactions (EFRPs).

Suminski said: “In addition to eliminating execution risk and providing a centrally cleared solution, the new platform adds great value thanks to its fully transparent anonymous central order book.”

The new service will connect to LCH. Clearnet as a central counterparty, eliminating counterparty risk and facilitating post-trade obligations and reporting.

“A broker presently has to register the cash and futures legs separately,” said Suminski. “The futures leg can be reported on our Basis Trade Facility but we do not offer the automated reporting of the cash leg.”

Adam Rose, head of financial derivatives at Euronext, said in a statement: “We would like to thank all three supporters, BNP Paribas, Credit Suisse and Societe Generale, who contributed to this innovative project and successfully helped to bring it to fruition. This is an important initiative for Euronext in our efforts to build out our derivatives business in order to respond to client needs, and we are very proud to be the first exchange to be able to offer this service on index futures.”

Featured image via iStock

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