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Eurex to Enter FX Fray

The European exchange is making a play in FX to ensure CME Europe doesn’t get the field to itself. 

Eurex is to offer FX futures and options trading to its
customers following an extensive consultation process. The
new offering is likely to provide early competition for
CME Europe, which is slated to begin operations with FX trading
in the next month.

The exchange is to offer six futures and options on spot FX
contracts, in EUR/USD, EUR/CHF, EUR/GBP. GBP/USD,
GBP/CHF and USD/CHF – the new contracts will open for
trading on October 7. Contract size will be 100,000 base units,
officials at the exchange add that price increments will be half
pips, explaining that feedback from customers suggested that
decimal pricing to a tenth of a pip was too granular.

Eurex already has two FX products available in its simulation
environment for its new trading system T7.

Contracts will be offered for maturities up to three years, across
the four quarterly standard IMM futures tenors (March, June,
September and December). Four semi-annual expiries and two
serial contracts for the succeeding two months will also be
available to trade. In keeping with current futures convention,
final trading day is the third Wednesday of the month and final
settlement will take place two days later.

In an effort to differentiate its offering, Eurex has also broken
new ground by making the options contracts available for
physical delivery via Continuous Linked Settlement (CLS).
Customers wishing to take physical delivery will need to be
members of CLS or a third party user of the mechanism. Eurex is
acting on CLS as a third party member and clearing firms need to
have a CLS infrastructure or connection in place to be able to
trade FX products. The European-style FX options contracts will
be auto-expired. By offering STP through CLS for physical
delivery, Eurex is seeking to reflect OTC market conventions and
help fungibility with those markets.

The daily settlement price will be calculated using the volume
weighted average price (VWAP) over a 60-second period ending at
17.30 central European time, although Eurex says if less than five
transactions take place during that period, the VWAP of the last
five trades executed during the previous 15 minutes or the mid-rate
at 17.30 CET will be used. The same process will exist for the final
settlement price although it will take place at 16.00 CET. Minimum
block trading size is 500 contracts (50 million notional) for all
products except for EUR/USD where it is 1000 contracts.

To help facilitate early trading of the new contracts, Eurex is
offering a market making scheme including revenue sharing and
trading and clearing fee rebates, the former to run until the end
of 2017, the rebates to run until December 2015. The amount of
revenue sharing will be determined by the share of order book
trading of the individual market maker. The exchange is offering
multiple market maker packages and says that several firms
have signed up to provide liquidity, however it is not able to
name them yet.

As an Advanced Designated Market Maker (ADM),
participants have to undertake to provide two-way prices for a
specified minimum number of contracts, while committing to
maximum spreads and a predefined quotation period. For the first
three expirations (month one, two and the next quarterly) in
EUR/USD the minimum amount is 50 contracts per side; it is 40
contracts in EUR/GBP; 30 in Cable and EUR/CHF and 20
contracts in USD/CHF and GBP/CHF.

The maximum spread for the same expirations is five pips in
EUR/USD, six pips in EUR/GBP, seven pips in Cable and 
EUR/CHF, nine pips in USD/CHF and 12 pips in GBP/CHF. In
all contracts ADMs are expected to have a price live for 70% of
the Eurex trading day. For longer dated contracts the
requirements are eased a little, although ADMs still need to
adhere to the 70% requirement. Eurex adds that during “fast
market” conditions, spreads can be doubled and minimum
quote size halved.

Eurex has created four packages of contracts and says ADMs
need to fulfil their obligations in two out of three contracts in a
single package to start qualifying for rebates and revenue sharing.
Only the top 10 market makers will qualify for revenue sharing.
Eurex says different contracts will be weighted when deciding the
top 10 makers, for example, USD/CHF will have double the
weight of EUR/USD.

In options on spot FX contracts, ASMs are also expected to
quote nine strikes around at-the-money in the front three contracts
and five strikes for expirations Q2 and beyond. The 70% time in
market rules also applies to options, these contracts also have
minimum quote size restrictions for ADMs.

Officials at the exchange tell Profit & Loss that while the
evolving regulatory environment has been a factor in the
development of the new contracts, they have been more driven by
customer demand. “Our existing customer base was very keen to
be able to trade FX products on Eurex,” one official says. “We are
able to offer them the STP provided by CLS settlement, but of
course we also have the counterparty risk mitigation that comes
from Eurex Clearing.”

The entry of Eurex into the FX space has long been anticipated,
Profit & Loss understands that internal and external discussions
have been ongoing for a matter of years over the nature of the
products to be offered. By aligning itself closely with the OTC
market, it is clearly attempting to carve a niche in the market
between the OTC and listed space.

The timing could be good for the exchange as it plans to launch
around the time the CFTC’s Dodd-Frank inspired SEF rules come
into place. Equally, the last few months have seen some early
casualties in the race to provide FX options trading technology,
with SurfacExchange, TradeWeb and BridgeTrade all delaying or
cancelling plans to offer platforms, thus thinning the field of
vendors seeking to tap into the market.

Eurex already has a foothold in the OTC FX options industry
through its interest in Digital Vega (Profit & Loss, July/August
2011) and officials at the exchange are keen to stress that this is
unaffected by the latest product release. They explain that Eurex
is seeking to add to the industry rather than replace an 
existing offering.

CME Europe is awaiting regulatory approval for a launch 
targeted for September 7. The Merc’s European arm is expected
to begin trading by offering 30 FX futures products; however, it
does not initially expect to offer options. 

Paul Gogliormella

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