Investment banks BNP Paribas and Goldman Sachs have completed a pilot phase with derivatives exchange Eurex after trading the first basket trade in equity total returns futures (ETRFs).
Eurex said the development marks a milestone in its support of the shift from over the counter (OTC) towards regulated, on-exchange trading.
ETRFs are listed futures that replicate returns of traditional, bilaterally negotiated equity or equity index-based swaps. Compared to a swap negotiated between two parties, Eurex said central clearing allows cross-margining and mitigates counterparty and settlement risk.
At the same time, the basket trade functionality (BTRF) allows traders to create a basket swap position within a set of underlying reference equities.
“The BTRF product represents an important development in the Equity Financing market by providing a listed product referencing standardised basket terms, as an alternative to a predominantly OTC traded product,” said Lorenzo Pasquale Longo, head of EMEA forwards trading at Goldman Sachs.
“In turn, it can offer market participants the benefit of optimising initial margin. We recognise the benefit that the BTRF product can generate for the market and are excited to contribute further to its development.”
The total return futures (TRF) scheme was launched by Eurex in 2016 with the listing of the first total return futures on the EURO STOXX 50 index. Eurex has since migrated over half of the Euro STOXX 50 OTC market to its product.
Currently, the notional value of Euro STOXX 50 index TRFs contracts is around €70 billion with over nine million contracts traded this year to date, according to Eurex.
“The ability to trade listed derivatives as a basket and the introduction of the concept of substitution is a significant step towards the listing of equity financing products and broadening market access,” added Antoine Danneel, head of equity finance Europe prime services and financing at BNP Paribas.
“We are confident it will attract many types of investors and market participants. It encompasses the benefits of futures while keeping the flexibility of baskets.”