The launch of clearing for flexible equity derivatives contracts on a segment of domestic Spanish exchange Bolsas y Mercados Españoles (BME) is expected to increase trading efficiency and reduce costs for market participants.
The BME's derivatives market, called MEFF, now allows members to register non-standard futures and options contracts based on all underlying stocks currently listed on its market, including on IBEX 35 stocks, the Spanish blue chip index. This allows users to specify the expiration date, strike price and settlement conditions of an equity derivative, as well as whether the product is a European or US style contract, and pass it through to MEFF's central counterparty (CCP) after execution.
According to Ignacio Solloa, deputy managing director, MEFF, using a CCP will lead to a more economical process when trading tailored equity derivatives contracts, in terms of risk and collateral management.
“Cost savings will accrue from the ability to trade with several counterparties via a CCP, which concentrates risk management and allows for netting,” Solloa told theTRADEnews.com. “This eliminates the need to hold multiple pools of collateral, as would typically be required under every bilateral relationship required for these types of contracts.”
While the launch of flexible equity derivatives complements impending European regulation that will seek to centrally clear and list over-the-counter derivatives on exchange, Solloa notes that the BME has been waiting to implement the new functionality for some time.
“This is an initiative we have had in the works for some years,” he said. “We were previously constrained by Spanish legislation governing underlying assets, which were changed at the end of 2010. We expect this initiative to stimulate equity derivatives volumes.”
According to the BME's own figures, futures and options trading on MEFF reach 4.3 million contracts in February, down 12.6% from the same time last year. Trading volume across the first two months of the year totalled 10.5 million contracts, a 2.1% increase year-on-year.