Liffe and Eurex to Offer MSCI Index Futures in Bid to Capture OTC Flow

Terry Flanagan

Europe’s leading derivatives exchanges, Eurex and NYSE Liffe, are to begin offering key MSCI benchmark indices as listed futures as a potential alternative to the current situation, which sees the popular indices traded as over-the-counter swaps.

The move is in response to the looming regulatory changes in Europe, in the form of Emir, and beyond which will see most standardized bilateral OTC derivatives contracts forced on to centralized clearing and eventually on to exchange-like venues in a bid to increase transparency and reduce systemic risk following the financial crisis.

Exchanges are looking to capture much of this flow and are launching a raft of new products to reel in parts of the vast global swaps market. And investors continuing to trade contracts bilaterally and over-the-counter in this brave new world are set to be hit with punitive collateral charges, as regulators look to significantly reduce counterparty risk.

Institutional investors are significant users of the MSCI benchmark indices and the move has been welcomed by many buy-side market participants.

“In the light of the upcoming regulatory changes, it’s very positive for us to have listed, liquid alternatives to OTC swap transactions,” said Eicke Reneerkens, head of derivatives trading at Union Investment, a German-based asset manager.

NYSE Liffe will be the first to begin trading the new contracts, from March 1, on the central order book with Eurex following soon after on March 11.

“During our market consultation, we discovered a high demand for broad MSCI indices among our participants and in particular strong interest in order book trading,” said Peter Reitz, a member of the Eurex executive board. “They also value the possibility of cross-margining with our existing benchmark index derivatives, for example Euro Stoxx 50 derivatives.”

Eurex, which is owned by Deutsche Börse, says that it can offer significant cost advantages for pledging collateral, while it says that it is the only exchange in the world that will be able to offer options as well as futures on regional MSCI indices.

NYSE Liffe, part of NYSE Euronext’s empire, was also in an equally bullish mood.

“Trades transacted on the central order book are fungible with those transacted through Bclear [the exchange’s trade confirmation, administration and clearing service], and by offering this extra dimension we give our customers the choice to execute business in a manner that best suits their needs and requirements,” said Ade Cordell, executive director of equity derivatives at NYSE Euronext.

Others, too, were excited over the announcement.

“Credit Suisse believes that the extension of the NYSE Liffe MSCI Europe Index futures product to an open order book will generate further growth in volumes and liquidity—providing end user investors with an operationally straightforward mechanism for accessing diversified beta,” said André Lamazouade, director, prime financing at Credit Suisse, an investment bank.

The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets within Europe.

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