Next Generation ETD Contracts - New contract identification concept and introduction of business initiatives

1.  Introduction

Eurex Exchange and Eurex Clearing (“Eurex”) aim to enable a more flexible set-up of Exchange Traded Derivatives (ETD) products and is therefore implementing an enhanced ETD contract identification concept to allow more than one expiration per month on product level (sub-monthly contracts). These changes create the basis for the introduction of several new product initiatives described in this circular. 

The market introduction will follow a two-step approach:

Step 1: With T7 Release 10.0, C7 Release 8.0, Prisma Release 11.0 in November 2021

• Full functionality for the new ETD contract identification concept becomes available for trading, clearing and risk management 
• Introduction of new contract attributes in reference data supporting the handling of sub-monthly contracts

With Step 1, Eurex will support both, the current and the new contract identification concept (“dual contract identification phase”). This means that participants can use a contract identification approach either based on month-year information (current concept) or based on day-month-year information (new concept). 

To support all market participants with this change to a new contract identification concept, Eurex has planned a transition period that allows for participants to choose their timeline for switching from the current to the new contract identification concept. This transition period will start with the introduction of the T7, C7 and Prisma Releases in November 2021 (Step 1) and last until end of March 2022 (Step 2). 

Please note that the contract identification in the trading area is already based on a numerical ID to uniquely identify an instrument which will remain unchanged. 

Step 2: End of March 2022

End of transition period (dual contract identification phase)

• End of parallel support of current and new contract identification concept. The new contract identification approach based on day-month-year information becomes mandatory to all market participants for trading and clearing of any Eurex ETD product. Therefore, market participants will no longer be able to trade and/or clear if the new contract identification approach is not supported. This also means that Trading Participants can no longer trade any ETD products at Eurex Exchange if their respective Clearing Member does not support the new contract identification concept.

Launch of new product initiatives

• Daily expiring Single Stock Futures for Option Volatility strategies
• Integration of Weekly Options contracts in standard product
• Market-on-Close T+X MSCI Futures (basis trading)

All information about the introduction of the Next Generation ETD Contracts can be found on our dedicated Initiative page under this link: 

Support > Initiatives & Releases > Projects > Next Generation ETD Contracts

2.  Required action

After the T7, C7 and Prisma Release launches in November 2021, denoted as Step 1 of the Next Generation ETD Contracts initiative, infrastructure changes will come into effect and support sub-monthly contracts.

In this context, by the above-mentioned release launches in November 2021, all participants, i.e. Trading Participants and Clearing Members, are requested by Eurex to be prepared with respect to reports, GUIs as well as interface changes (e.g. FIXML).

Eurex strongly urges all Trading Participants and Clearing Members to take appropriate actions during the transition period (dual contract identification phase), i.e. between Step 1 and Step 2, in order to be able to handle products containing contracts with sub-monthly expirations and to switch to the new contract identification concept based on day-month-year as soon as possible. 

All Clearing Members can determine the timing of when to switch to the new contract identification concept within the transition phase even before sub-monthly contracts are activated. However, and in any case, they need to have the switch completed at the latest by the end of Q1 2022. 

Trading Participants must continue to use the already existing numerical ID to identify the trading instrument, i.e. there will be no change in accessing the T7 instruments via the corresponding T7 interfaces.

With Step 2 completed at the end of Q1 2022, Eurex will no longer support the current contract identification concept – trading and clearing of any Eurex ETD products will only be possible for market participants who support the new contract identification concept based on day-month-year notation. At the same time, Eurex will introduce product initiatives with sub-monthly expiries - requesting all Trading Participants and Clearing Members to be prepared until then.

Contracts with sub-monthly expirations will be incorporated into the Risk Management Framework with no major changes and risk calculations will be performed using established PRISMA methodology. Participants will receive Transparency Enabler (TE) files which will be extended to reflect the contract type and date.

All Trading Participants and Clearing Members are requested to participate in the simulation phase. Eurex intends to provide additional testing opportunities regarding products containing contracts with sub-monthly expirations well in advance before the production launch. Details about the simulation will be provided at a later point in time.  

3.  Details

A. Cross-systems concept – Key fields 

Adapted contract key fields 

Eurex is planning to change its contract identification concept with the aim of implementing a future-proof set-up. By changing the contract key, key fields which make a contract unique will be adapted. The key fields apply to standard as well as to flexible contracts. With T7 Release 10.0, C7 Release 8.0 and Prisma Release 11.0 in November 2021, the following key fields will make a contract unique:

• Product Symbol
• Contract Date
• Contract Type
• Settlement Method
• Call/Put (options only)
• Strike Price (options only)
• Version Number (options only)
• Exercise Style (options only)

New key fields

The fields Contract Date and Contract Type will be newly introduced. Contract Date (expressed by a DDMMYYYY notation) allows more flexibility in characterising a contract by a date information. In most cases the expiration date is suitable to characterise a contract, but in some cases the contract date is different to the expiration date (e.g. Money Market contracts, MSCI contracts). Next to the Contract Date, the Expiration Date will be available as non-key field.

The Contract Type will be used to differentiate between a standard and flexible product in the future. The Flexible Product ID however will remain as a non-key field for flexible contracts.

Settlement Type and Exercise Style will also be introduced for standard contracts. However, Settlement Type and Exercise Style will not differ for standard contracts within the same product.

B. Migration strategy 

Positions

Eurex Clearing will not perform a position conversion with the introduction of the T7, C7 and Prisma Releases in November 2021, nor with the start of the introduction of sub-monthly contracts at the end of Q1 2022.

With Step 1 and the system releases in November 2021, the contract identification will be adapted, but does not require a position conversion on Eurex.

The integration of the weekly contracts will be performed by contract expiration in the weekly products and simultaneous contract creation of the corresponding weekly contract in the main product. Therefore, also for the integration of the weekly contracts, no position conversion will be required.

Transition period (dual contract identification phase - current and new contract identification concept are valid)

During the transition period between the releases in Q4 2021 and the introduction of products with sub-monthly contracts end of Q1 2022, Eurex will continue to offer all participants the possibility to use MMYYYY contract information. After the introduction of sub-monthly contracts in Q1 2022, Eurex will not accept requests containing MMYYYY information anymore. Hence market participants need to switch to the new contract identification concept latest by end of Q1 2022.

C. Overview on planned product initiatives

The changes outlined above create the basis for the introduction of several new product initiatives (subject to their respective regulatory approval, if required). The following shall serve as an overview only, detailed information will follow before the product initiatives are launched.

Volatility Strategies in equity options

An Options Volatility Strategy (“OVS”) is a multi-leg instrument containing an option part and a futures leg – also denoted as underlying leg – to create delta-neutral trades. Currently, similar to index options, OVS are also provided for equity options with the corresponding Single Stock Future as underlying leg expiring on a monthly basis. 

To improve the OVS offering in the equity options markets, daily expiring Single Stock Futures will be introduced and used as underlying leg in an OVS of the corresponding equity option. 

Integration of Weekly Options

Integration of Weekly Options means that all contracts of all Weekly Options products contributing to a weekly expiration pattern are integrated into the corresponding main option product. The Weekly Options products are dissolved after the integration is completed. 

Weekly expiring options contracts can be included as leg instruments to any option strategy, i.e. to any standard option strategy, non-standard option strategy or option volatility strategy in accordance with the definition of the corresponding option strategy template. Thus, the rolling of positions within different weekly expiring contracts or between weekly and monthly expiring contracts is supported by using a suitable option strategy.

The concept of integrating weekly options will be applied to all side products and their corresponding main product in the derivative markets of equity index options, equity options and options on Fixed Income Futures supported at Eurex.

Market-on-Close Futures T+X (Basis Trading)

An efficient way to provide basis trading functionality is based on daily expiring index futures with an end-of-day settlement procedure, i.e. where the final settlement price is identical to the underlying index close.

Daily expiring contracts with a lifetime of three business days are introduced to an already existing index future. Consequently, on each business day, there are three additional contracts expiring on the current, the following and the subsequent business day. 

To support basis trading, calendar spreads are introduced with a daily expiring contract representing the near-term leg and a monthly or quarterly expiring contract representing the long-term leg. Provided the spread price does not change until the expiration of the daily expiring contract, a trade in such a calendar spread will result to a position in the monthly or quarterly expiring contract with a price difference to the underlying closing price identical to the calendar trade price. 

The calendar spread basis trading concept solves many issues of the already existing market-on-close product concept. 

As a first step, Eurex intends to provide the basis trading functionality to all MSCI Futures.
 

Attachment: 

• Further technical details

Further information