“Eurex stands for a successful growth story”

Mr. Peters, you recently announced over-the-counter trades tracking Total Return Futures on the FTSE 100, plus Dividend Futures and classic futures and options contracts on the index. What is the background?

Peters: With Total Return Futures, we are supporting the shift from over-the-counter business to regulated markets with central clearing, as desired by the regulators. We started in 2016 with Total Return Futures on the EURO STOXX 50®. If you look at the corresponding OTC instruments, such as equity index swaps, the shift has been successful. Total Return Futures traded and cleared on Eurex now account for more than 50% of the market. 

What are the benefits for market participants?

Peters: Central clearing provides considerable advantages for market participants: as, according to the requirements for non-cleared derivatives – the Uncleared Margin Rules – these positions must be backed by increased collateral. In addition, central clearing simplifies settlement and reduces counterparty risk. The new Total Return Futures based on the FTSE Index, which we are launching at the end of the month, are therefore the next logical step. It is our goal to extend the offering to further indices. Our task is to standardize products and provide market participants with margin and capital efficiencies on the post-trade side. 

With classic futures and options, you are competing with Intercontinental Exchange’s corresponding contracts. How do you assess the chances of gaining market share here?

Peters: The launch of these contracts should be seen primarily in the context of the completion of our existing product portfolio. We are thus following a frequently expressed request by market participants in offering the FTSE-related Total Return and Dividend Futures, as well as the classic FTSE contracts, combined on one platform. This way, we ensure margin and capital efficiencies for our customers.

Next Tuesday marks the start of the Derivatives Forum at Eurex. How has the response been, and how has the Forum established itself?

Peters: It will be a high-profile event covering around 90 topics. We are hosting the Forum for the fourth time this year and the response has been very positive – the Forum has become the leading industry event in Europe. In 2020, we had 750 registrations; for next week’s digital format, we count more than 3000 registrations, of which more than 20% are from Asia and the US. The Forum is perceived as an international event from Frankfurt. We are thus making a clear commitment to Frankfurt as a location. The good mix of event partners, including top banks such as Goldman Sachs, Deutsche Bank, and leading trading houses such as Susquehanna, is also a positive factor.

Müller: It is also worth noting that the CCP Risk Management Conference, jointly organized for the third time by the Chicago Fed, the ECB and the Bundesbank, established itself as another high-profile event in Frankfurt. In addition to Eurex Clearing, the other major players in the industry – CME, Intercontinental Exchange and London Clearing House – also took part. Both events underscore Frankfurt’s great opportunity to establish itself as the European center for derivatives trading, risk and collateral management. Other places, such as Amsterdam and Paris, may have attracted traders amid the backdrop of Brexit, but Frankfurt has clearly won the race among international banks. Many of these banks have transferred their assets, such as securities, collateral and equity, interest-rate and currency derivatives, to Frankfurt. Risk management plays a big role here.

How did Eurex cope with the Corona crisis?

Peters: The pandemic was also a stress test for us. For employees, the organization and infrastructure – for example trading, clearing and risk management. But everything worked extremely well. We started to distribute the relevant teams for exchange trading and clearing to different locations early on, in order to avoid infection clusters and ensure operations during critical market phases. We were always in close cooperation with the regulators, BaFin and the country’s stock exchange supervisory authority, as well as our customers. Once again, we have demonstrated that we create trust in the market.

Müller: There was a debate about market closures and intervening in price formation by banning short selling. Some countries have done that, but the Netherlands and Germany have not. You cannot stop a price collapse of global proportions by regional market closures. Nor should this be the case if the market is still working. The price swings were extreme but that doesn’t mean that price formation did not work. Quite the contrary, it worked smoothly. For Frankfurt as a location, it was important that there was no artificial intervention here. The second important aspect in this context is risk management or clearing. We are one of the four major global clearing houses. The central clearing houses serve as a firewall in the event of a market participant defaulting, because they guarantee execution. Our CCP has proven to be completely resilient during the crisis and the other global CCPs have also performed well.

What makes you stand out from your peers?

Müller: We have a special self-calibrating value-at-risk method in clearing. Using this risk calculating method, called Prisma, we can transparently calculate in advance what margin requirements will arise in the event of various fluctuations. This allows market participants to better prepare for all eventualities and plan their liquidity. In addition, we offer real-time risk management. We are perceived as a global leader with this method. The CME now wants to switch to a similar method. Another element where we take the lead is anti-procyclicality management. This refers to certain model elements that prevent erratic margin swings. These include so-called margin floors, i.e. lower limits for margin requirements, so that we do not fall below even in calm times. In the phase of extremely low volatility before the Corona crash, this meant that the requirements were not reduced too much. Accordingly, in the highly volatile phase at the peak of the crisis, we did not have to raise our margin requirements as much as other clearing houses.

What particular challenges does Eurex currently face?

Peters: We are living in times of great change, politically, technologically and socially, not to mention climate change. But we also see these challenges as opportunities for growth – for example, in the area of sustainable investing or through the push towards e-commerce.

Where do you especially see growth potential for Eurex?

Peters: Eurex has always represented a successful growth story. We now generate over 1 billion euros in revenue. Despite Corona and regardless of cyclical fluctuations, we still see attractive opportunities to continue this growth trajectory. The shift from OTC business to a regulated environment through exchange-traded futures contracts is certainly a key driver. In addition, there is a trend towards passive investments from which we are benefiting. With our broad range of MSCI derivatives, we are the global leader in outstanding contracts with a market share of over 50%. However, we also see great growth potential in ESG, which is another significant driver. The EU's Green Deal, which aims to achieve a climate-neutral economy by 2050, initiates a massive transformation with a corresponding reallocation of capital. We play an essential role by offering innovative derivatives that both enable the ESG investment footprint and manage sustainability risks. We launched our ESG segment in February 2019 and now have 15 ESG contracts, including the DAX, EURO STOXX 50 and STOXX Europe 600, as well as five MSCI indices. We will continue to expand the product range. The ESG issue is gaining further momentum following Biden’s inauguration and the return of the USA to the Paris climate agreement.

What potential do you see in the clearing sector?

Müller: The clearing of non-exchange traded asset classes is another important driver for our growth. Eurex Clearing today offers innovative and integrated solutions, not only for exchange-traded products, but also for OTC-traded derivatives and repo transactions. A prominent example here is the clearing of Interest Rate Swaps. However, we also see important growth potential in the foreign exchange area. With a daily volume of 6 trillion dollars, this is the largest market in the world. Nevertheless, the FX market still has a surprisingly low level of electronification and only takes place to a small extent via exchange-regulated markets. Four years ago, we acquired 360T, one of the leading Fintechs in Germany. 360T is a global provider of web-based trading technology for OTC FX trading. By combining it with the exchange-traded FX derivatives of the derivatives exchange and the possibilities of central clearing, there are many opportunities for growth. For example, we are currently working on a clearing service for Cross Currency Swaps.

How is euro clearing, i.e. OTC clearing of Interest Rate Derivatives, developing?

Müller: Interest Rate Derivatives are the second largest market in the world. In the wake of the financial crisis, the G-20 introduced a quasi-global clearing obligation for standardized Interest Rate Derivatives. The aim of this clearing obligation is to avoid bilateral exposures between banks by interposing a neutral risk manager in the form of CCPs. With the introduction of the clearing obligation, this business has been concentrated in London to a very large extent over the last ten years. Eurex had also invested in the expansion of clearing systems at an early stage. However, we only achieved the breakthrough in clearing Interest Rate Swaps and Repos with the partnership program. We had to motivate dealers and market makers to offer attractive prices in order to gradually build up a liquid alternative to the London Clearing House. We involve the ten most active houses in the corporate success and governance of Eurex Clearing AG. The impact of the program is enormous. There is no longer price disadvantage compared to London. We now have an outstanding volume of over 20 trillion euros and a market share of around 20%. We are seeing an enormous influx of customers. Around 90 banks are now directly connected as clearing members and the number of end customers has doubled over the last 18 months to around 400. These include, for example, investment companies, small and medium-sized banks, pension funds and public institutions such as KfW, the Finance Agency and its counterpart Dutch State Treasury in the Netherlands. The business at the long end, in particular, is growing very strongly. We are fully on track to achieve a market share of 25%.

Shouldn't the EU Commission be exerting a little more pressure on the market?

Müller: For the Commission, the shift to the EU is apparently not fast enough. It is telling the market that the still very strong dependence on the London Clearing House is unacceptable from a system stability perspective. According to the EU, the market needs to become less dependent upon UK financial market infrastructure after Brexit. In 16 months, the London Clearing House equivalence will expire. So, the pressure is growing on market participants to relocate on a larger scale, and we are ready with our offerings. Repos also play a big role in our clearing portfolio. We have Bond Futures, Interest Rate Swaps and Repos on one platform, offering market participants maximum efficiency in the euro. Our goal is to be the “Home of the euro” in the fixed income area – and that is where euro clearing embeds itself.

This interview was first published in the Börsen-Zeitung on 19 March 2021.