10.22.2020
By Shanny Basar

Exchanges Take Differing Approaches To ESG Derivatives

Deutsche Börse’s Eurex has launched a suite of derivatives based on ESG versions of benchmark indices while Nasdaq aims to launch bespoke products to meet the variety of environmental, social governance strategies in the market.

This month Eurex announced that it is launching ESG futures and options on DAX 50 ESG and EURO STOXX 50 ESG indices. The exchange is adding another European benchmark to its offering and covering the German market for the first time in ESG derivatives.

Randolf Roth, Eurex

Randolf Roth, member of the executive board of Eurex, told Markets Media: “The DAX 50 and Euro STOXX 50 are very successful contracts, so the introduction of ESG versions is the right concept.”

Last year Eurex established derivatives contracts on ESG versions of the major STOXX European benchmarks. In 2018 Nasdaq began trading a future based on the Swedish OMXS30 ESG Index.

Alessandro Romani, head of European equity derivatives at Nasdaq, told Markets Media that the exchange is aiming to launch ESG contracts next year based on custom basket forwards, a bespoke basket of stocks created by investors, subject to regulatory approval.

“Investors can customize a basket of stocks to hedge more sophisticated ESG strategies that go beyond using indices,” Romani added.

He continued that Nasdaq’s ultimate ambition is to be able to include liquid stocks from all developed markets in the custom basket forwards.

Alessandro Romani, Nasdaq

The derivatives industry is responding to the ESG challenge with a variety of strategies,” Romani said. “Bespokeness is our differentiator.”

Eurex’s Roth continued that the ESG space is challenging for an exchange developing standardized products, as there are so many different types ESG concepts provided by the index providers.

“In order for us to launch products we need to see real customer demand in the specific ESG concept or product,” he said. “Another important benchmark for real customer demand are the assets under management on an index or the related exchange-traded funds.”

Roth explained that most of the volume in exchange-listed contracts globally is currently in the exclusion-based index concepts.

“Over time we will also see deep liquidity pools in ESG concepts which go beyond exclusion only,” he said. “Examples would be products selecting the best in class ESG companies or SRI investing.”

The new DAX 50 ESG and EURO STOXX 50 ESG contracts are based on indices which incorporate ESG scores in addition to excluding undesirable securities related to Sustanalytics’ Global Standards Screening.

Volumes

Roth said: “The ESG derivatives space is very competitive. Measured by open interest, Eurex is clearly number one in European indices, which gives customers the advantage of capital efficiencies.”

Total notional traded since Eurex launched STOXX Europe 600 ESG-X futures and options last year has exceeded €20bn and there are almost 100,000 outstanding contracts.

In June this year Eurex received approval from the US Commodity Futures Trading Commission for U.S.-based investors to trade six new equity index futures on ESG indices.

Eurex said a handful of US clients are trading Eurex’s STOXX 600 ESG-X derivatives from the Americas. The exchange added that U.S. and Canadian clients are at a much earlier stage than their European peers in incorporating ESG benchmarks in their portfolios, but adoption is growing at a very rapid pace.

Nasdaq said that it its first year the OMXS30 ESG Index traded one million contracts. Romani added that a total of 2.3 million contracts have been traded since the contract launched on 15 October 15 2018.

“This year 1.2 million contracts have traded which is more than in the whole of 2019,” Romani said. “Approximately 40% is agency flow which is important as it shows that demand is client-driven.”

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