Eurex
Equity Total Return Futures (ETRF) and Basket Total Return Futures (BTRF) aim to support equities financing desks which are focused on collateral optimization and the use of equity collateral to raise financing. We spoke to Enrico Vlaic, Senior Equity Finance Trader at BNP Paribas, about their purpose and benefits, and how to use them in a smart way.
Enrico, you have supported Eurex in developing the ETRF/BTRF offering for equity financing. What solutions and benefits do they offer market participants?
ETRFs and BTRFs offer the first listed solution for balance sheet efficient financing of equities. Equity financing is a very deep market with balances of hundreds of billions of dollars worldwide traded in various forms (repo, swaps, certificates, etc.). Adding a listed alternative is a fundamental step towards increasing the liquidity, standardization, and transparency of prices that will attract more participants to equity financing markets. ETRFs and BTRFs are built around the same infrastructure and formulas used for the EURO STOXX 50® TRF, with a clear screen price expressed in basis points over an overnight interest rate. This can create relative value trades between indices and baskets and will attract new players to the equity financing markets, just like we saw after the launch of the EURO STOXX 50® TRF in 2016.
Basket Total Return Futures aim to replicate OTC financing swaps in a listed environment. To do so they bring two completely innovative features to the market: the concepts of a basket of derivatives and of substitution. When trading a total group of ETRFs, an investor can bundle them in a BTRF (basket of ETRFs): all ETRFs in the basket will share the same basket ID and will not be fungible with identical ETRFs the investor has traded outside of the basket. Members can substitute single ETRFs inside the basket following a set of standardized rules. In this way, funding will always be raised against an equity available to the party that raises funding. This is exactly what happens in OTC swaps. In other words, when trading a BTRF, the parties agree to a funding amount, a duration, an interest rate, and a set of rules for substitutions within a defined universe, but the actual basket itself may vary from time to time. Substitution can only be done between the trade’s two original counterparties. This is particularly important for large size trades when knowing your counterparty is important. Despite this feature, BTRFs are listed products and, in case of a party defaulting, the market steps in, thus erasing any counterparty risk.
The basket feature has wider implications that go beyond BTRFs. It will soon be possible to bundle together any number of Eurex derivatives into a basket and trade them in a single lot with other market participants and clients at an agreed price. This will be a very powerful tool to create bespoke baskets of listed derivatives and make pricing and trading very easy for investors.
How would you overcome current challenges in the market – for example Uncleared Margin Rules – by using ETRFs/BTRFs?
Since 2016, margin requirements on OTC products have been gradually phased in, covering more activities and affecting more market participants. These days, banks need to set aside a big chunk of collateral to satisfy these requirements; this is costly and, at the same time, drains scarce collateral from financing markets. To attenuate these costs, we see two kind of initiatives: on one side, there are several initiatives to improve the efficiency of collateral utilization, often involving triparty agents, and on the other side more products are moving away from OTC to a cleared environment to reduce margin requirements.
Opening equity financing positions at Eurex through ETRFs/BTRFs does not attract UMR and offers the opportunity to reduce listed margin requirements through the cross-margin facilities offered by Eurex Clearing, which is the European leader for equity derivatives.
What are the main use cases and special features of this offering?
ETRFs/BTRFs have multiple uses. The main use is to replicate OTC financing swaps in a listed environment. Unlike Single Stock Futures (that can also be used for financing), pricing BTRFs is easy as they simply quote as a spread over an interest rate. Thanks to their substitution feature, BTRFs can at all times follow the equity inventory available to the party raising cash, and they don’t expose market members to the risk of unforeseen corporate actions. They nevertheless are, in effect, term trades, and thus raise term funding for investors.
What was your trading experience so far? And looking ahead, how do you see the offering developing?
BTRFs have generated quite some interest in the market and volumes are so far encouraging. In total, we have seen slightly less than EUR 2 billion notional. Trading BTRFs in T7 is easy. A basket import function helps when trading baskets with several components and a copy/paste function is under development to even further enhance the ease of trading. T7 stores all open positions for a market member, helping traders to track what is open against whom. ETRFs/BTRFs are currently available for trading on a set of standard maturities and on the 300+ constituents of EURO STOXX indices (SXXE). I believe expanding the set of maturities, allowing flex trades on non-standard maturities, and going beyond underlyings listed in euro, should be priorities for further development of the offering.
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