Setting the benchmark

Eurex’s €STR Futures, referencing the new Euro-denominated risk-free rate, show significant growth throughout 2024, with increased participation and trading volume. As institutions shift toward adopting €STR, several factors, including margin efficiency and enhanced order transparency, drive growth and further Eurex’s ambition to build out the home of the Euro yield curve. With inter-product spread functionality available between €STR and Euribor, investors are better equipped to manage risks and execute their orders. ​​​​​​

Where do we now stand with the development of €STR Futures on Eurex?

Pascalis: €STR Futures have seen steady growth, particularly in terms of participation and volume. Average daily volumes have consistently averaged 120,000 contracts, and open interest has grown to over 300,000 contracts.

Stillert: The most encouraging development is increased participation from various market participants, including banks, hedge funds and asset managers.

What are some of the key factors driving adoption?

Pascalis: One significant factor is margin efficiency, achieved by consolidating both short- and long-end derivatives at one CCP. For example, if a trader clears both €STR and Schatz futures at Eurex Clearing, they can realize margin offsets of up to 80%. This efficiency is highly attractive to institutions looking to optimize capital usage. Additionally, recent changes, such as moving to a price-time or "first in, first out" (FIFO) matching model, improved order execution transparency. Unlike pro-rata matching models, where relative order size dictates fills, the FIFO system ensures traders can predict their fills with certainty.

Stillert: The shift to a FIFO model lets traders know their exact position in the order queue. If a trader places an order for 100 lots and they are at the top of the queue, they will be fully filled if that volume trades at their price. This certainty is not possible with the pro-rata-based models, where traders often receive partial fills based on the overall size of orders, regardless of timing.

What does the inter-product spread between €STR and Euribor bring to the market?

Pascalis: The inter-product spread functionality (IPS) was a significant development. This feature allows traders to execute spreads between €STR and Euribor with a single click, ensuring both legs are filled simultaneously without execution risk. However, at Eurex, traders hold separate positions in the two underlying contracts once the spread trade is executed. This gives investors a lot of flexibility regarding how they can trade in and out of the spread between €STR and Euribor.

Stillert: Another important advantage is that we can imply order book liquidity from Euribor to €STR via the inter-product-spread and vice versa. This means that when you trade with €STR, you simultaneously use the liquidity of the €STR contract and that of the Euribor contract. The advantage of this is that you may get a better and faster execution for a larger order than the order book provides at first glance.

How is the market's adoption of €STR Futures evolving compared to Euribor?

Pascalis: While there is growing interest in €STR, especially among banks and buy-side participants, Euribor still plays a significant role in the market. Unlike the US and UK, where regulatory pressure led to a quicker transition to risk-free rates, the shift from Euribor to €STR in Europe seems more gradual. Even though banks increasingly reference €STR for shorter-term swaps up to about two years, longer-term contracts are still tied to Euribor, indicating that a full transition will take time unless regulators push for change.

Stillert: Banks are integrating €STR Futures gradually, with adoption varying by desk. Some banks are focused primarily on Euribor, but there's a noticeable shift toward €STR based on client demand for the product. For example, traders looking to position themselves around ECB policy, which is directly linked to €STR rather than Euribor, prefer €STR-linked contracts.

How is the move to bring Euribor onto Eurex going?

Pascalis: There is a certain degree of stickiness with any product traded in an order book on another exchange, and while we have more than 50% of the ADV in €STR, we only have around 6% in Euribor. 

However, the initiative to bring Euribor Futures alongside LTIR to bring greater capital efficiencies to the market is ongoing. A key question for now relates to EMIR 3.0 and what exactly this will require from EU market participants subject to the clearing obligation regarding Short Term Interest Rates (STIRs). Euro STIRs are defined as a systemically important product and, therefore, one of the products that EMIR 3.0 foresees to clear via an active account at an EU CCP. 

This article was first published on The Desk.