Expanding a successful TRF offering: MSCI Total Return Futures now live

What is behind the launch of MSCI TRFs at Eurex, and what do they bring to the buy side?  

The launch of Total Return Futures, listed instruments that offer the same exposures as OTC swaps, has been one of the most significant innovations in listed derivatives markets in recent years. Having pioneered the concept with the launch of EURO STOXX® TRFs in 2016, followed by the FTSE 100 TRFs in 2021, Eurex has now launched TRFs on the major MSCI indices. The launch brings together trading and clearing futures and options on the indices and TRFs into one platform and CCP, offering security and efficiency to the buy side.  

What are MSCI TRFs? TRFs, Index Futures, or is it more of a hybrid product? 

Zubin Ramdarshan: I would not classify them as a hybrid product. The best way to think about TRFs is that they are part of the market beta solution, as they address the question of how investors can get exposure to market beta. If you look at what is on offer today, there are cash baskets, ETFs, plain vanilla futures, OTC swaps, and the listed expression of the OTC swap, which is our total return future. So, they are not hybrid products in that sense, but they are another instrument used to gain market beta exposures. 

Damien Zinck: I agree. These products are TRFs but ones that are based on the MSCI indices as opposed to the other indices we already offer, such as the EURO STOXX 50® or the FTSE 100. It is a product in the TRF and MSCI families but primarily a TRF.  

"The best way to think about TRFs is that they are part of the market beta solution as they address the question of how investors can get exposure to market beta".

Zubin Ramdarshan, Head of Equity & Index Product Design, Eurex  

What is the reasoning behind the launch? 

Zubin Ramdarshan: Like with all the products we launch, the rationale for the launch is client demand. That demand has come in part from the success of the EURO STOXX 50® TRF, which has been phenomenally successful, reaching the point where the whole inter-bank market has moved onto the product.  

So, it is a natural evolution for us to work with other index providers to expand our offering. We have worked with FTSE and are now working with MSCI, having launched, and grown the MSCI futures and options complex. Within the futures and options segment on MSCI, we have a range of different index types such as GTR, NTR and price return. Launching the TRF on the MSCI indices is a natural expansion for clients seeking to achieve exposure, it offers market beta in the form of a total return future.  

Damien Zinck: The swap market in the EURO STOXX 50® total returns has entirely moved over to the Eurex TRFs. However, clients told us they still trade swaps on MSCI indices, such as the Emerging Market Index, and that they are looking for a listed equivalent to move away from the OTC products. So, we see an opportunity based on the interest from clients to switch from swaps to TRFs by expanding the segment.  

Who are you targeting to trade the MSCI TRFs? 

Damien Zinck: We are targeting investors such as pension funds, insurance companies and asset managers, as well as the banks providing access to these products. The TRFs enable their clients to get the same exposure they can get in the swaps market but with all the benefits of trading a listed product.  

Why should the buy side trade TRFs? 

Damien Zinck: If they currently trade total return swaps, there are several advantages of gaining the same beta exposure through an instrument that carries the benefits of a listed instrument. These benefits include the elimination of counterparty risk, the possibility of adding or reducing their position easily compared to swaps, and, of course, regulation.  

The costs of swap trading have become significantly more expensive following the introduction of the Uncleared Margin Rules, which require firms to post an initial margin when trading swaps. In futures, the initial margin is a lot lower. Therefore, there are cost savings, and clients can reduce their overall OTC exposure.  

Trading TRFs is also interesting for clients who have a long-term investment horizon. We offer TRFs with one-, two- or three-year expiries, which brings efficiencies compared to using regular futures and rolling them every quarter.  

It simplifies their processes as they can get exposure for longer periods in a single trade and lock in their financing for the entire period upfront. So, TRFs are not just an alternative to the swaps market; they are also an alternative to regular futures.  

Zubin Ramdarshan: I think there is always a balancing act for investors. OTC instruments offer highly customized and precise hedges against exposures across specific maturity horizons but at a higher cost than a standardized, listed product. They may have more standardized terms but come at a lower cost and increased transparency.  

Investors should also consider that trading the TRF on Eurex opens up several other strategies. Investors can trade European benchmarks, the UK benchmark, the MSCI World and EM benchmarks with TRF instruments as well as vanilla futures and options on one platform. We offer an ecosystem where all these strategies can be executed at the same venue and cleared into a single clearinghouse, which is very margin efficient.  

Another benefit is having total transparency over what happens during market disruptions. We strive to ensure that there is economic neutrality in the outcomes in these instances, which, while infrequent, can be extremely material in their implications.  

Take the introduction of Russian sanctions after the invasion of Ukraine, for example. They are aligned very quickly with the MSCI indices. However, if you are trading OTC under ISDA documentation, there may not be sufficient definitions to cover that specific situation. So, you would effectively be entering a bilateral negotiation with your counterparty. This brings uncertainty and complexity.  

"TRFs enable their clients to get the same exposure as in the swaps market with all the benefits of trading a listed product".

Damien Zinck, Vice President Equity & Index Sales, Eurex  

Contacts:

Damien Zinck
Vice President, Equity & Index Sales, Eurex
damien.zinck@eurex.com

Zubin Ramdarshan
Head of Equity & Index Product Design, Eurex
zubin.ramdarshan@deutsche-boerse.com