Eurex Home Market Settlement drives the further unification of the single stocks derivatives market

While equity derivatives investors can take positions in OTC and structured products, changes such as stricter regulatory enforcement of uncleared margin and the demand for higher transparency made more traders choose listed venues to trade single stock contracts.

However, these advantages alone do not guarantee success. To continue attracting and building liquidity, exchanges such as Eurex constantly implement unification processes and reduce cost barriers.

Today, Eurex hosts Europe’s most liquid venue for single stock options, with about 70 million contracts of open interest — equivalent to €250 billion. Traders can gain exposure to more than 500 shares from 13 countries using American and European-style options with weekly and monthly expiration cycles of up to five years.

This has moved the European market away from its initial structure of home exchanges, where single stock derivatives would trade on the domestic exchange of origin. Over time, market structure increasingly moved towards a hub model, where traders execute their business at one venue and can leverage efficiencies such as cross-margining.

Eurex offers margin efficiencies across its single stock product range and index products. Other unification measures include a single rulebook for corporate actions, which, in addition to its membership of the European Corporate Actions Committee, ensures consistent corporate action treatment and minimal market disruption.  

Together, these features reduce friction and inefficiencies in the trading lifecycle, smoothing out the market and ultimately encouraging greater liquidity.

Home market settlement

The latest step in this constant effort of efficiency-seeking is the home market settlement service, a measure that significantly reduces the operational costs of the single stock market.

The current settlement infrastructure requires that firms can only settle physically delivered equity options and futures at Clearstream Banking Frankfurt. This set-up obliges clients to re-align their assets, i.e. moving assets from their domestic central securities depository to CBF for settlement.

With home market settlement, clients can settle their physical deliveries directly at the Euroclear ESES CSDs (France, Belgium and the Netherlands). For liquidity reasons, this aligns with the market’s preference to hold domestic equities in their local home market.

“With the implementation of Eurex’s Home Market Settlement project and connectivity to the ESES CSDs, allowing clients to settle directly at the respective Home Market” Kaltrina Hamza, Securities and Collateral Clearing Design at Eurex.

“As such, re-alignment of assets can be avoided, significantly reducing the number of delivery instructions required for settlement, bringing down the risk of settlement delays and failures. Ultimately, it results in lower settlement costs across the market.”

For now, home market settlement only applies to ESES CSDs. However, as a next step, Eurex intends to expand the offering to other European markets, including Italy and Spain. The long-term goal is to enable home market settlement for all components of the EURO STOXX 50®. Meanwhile, Clearstream remains a fundamental part of Eurex’s infrastructure, with its own set of innovative utilization such as the Investor-CSD solution for market participants.  

Cross-CSD settlement at Eurex will use the European harmonized settlement infrastructure of the Target2-Securities platform.

“The main driver of the overall project is to help our clients to improve their operational processes,” adds Hamza. “Our goal as CCP and market infrastructure provider is to ensure and further improve settlement efficiency on the market.”

This article was initially published at The Trade.