Newly-independent pan-European exchange operator Euronext will develop its core equities offering as well as boosting its hitherto “under-exploited” derivatives capabilities, according to CEO Dominique Cerutti.
Euronext has rolled out a number of derivatives initiatives this year as well as making key hires as part of its efforts to reposition itself as Europe’s leading “capital raising centre” in the aftermath of its divestment by US-based Intercontinental Exchange (ICE).
But the firm will also use changes to European equities regulation to bolster activity in its equity markets in Belgium, France, the Netherlands and Portugal. Interviewed for the Q3 2014 edition of The TRADE, Cerutti said Euronext would fine tune its existing market model to attract more blocks, through a combination of its core regulated markets and its Smartpool pan-European mid-point matching dark multilateral trading facility (MTF).
"We intend to invest in new liquidity services that will empower both buy- and sell-side to achieve best execution through a range of execution choices compatible with the regulatory reforms under MiFID II," Cerutti said.
MiFID II enforces strict limits on the amount of trading conducted in dark pools, with the exception of orders that use the large-in-size pre-trade transparency waiver. With the new rules forcing broker crossing networks (BCNs) to radically change their models – either becoming MTFs or operating on a strictly bilateral basis – Cerutti predicts brokers will in future route larger orders to exchanges rather than slicing them up for internalisation on their own pools. Noting the Level 2 consultation process being conducted by the European Securities and Markets Authority, Cerutti wants the regulator to maintain the hard line on BCNs taken by politicians.
"Drafting ambiguities in the Level 1 text may be seized upon by some to argue that BCNs can operate within the bilateral, own account environment of a systematic internaliser. As a result, Euronext is strongly urging regulators to avoid such an outcome which would be detrimental to the overall market as well as contrary to the political agreement in MIFID II," he said.
Euronext has already focused on extending its continental derivatives portfolio, after ICE took on the London-based LIFFE exchange when it acquired NYSE Euronext Group last year.
In July, Euronext became the first European exchange to launch index futures with weekly expirations, with contracts based on its CAC40 and AEX indices in Paris and Amsterdam respectively. The shorter expiry will trade alongside traditional monthly and quarterly dates and are intended as a hedging tool through dividend season.
It also launched a series of ‘spotlight’ options in Amsterdam and Brussels, designed to give more visibility to underlying assets such as medium- and smaller-sized companies and newly listed stocks. These contracts also have short maturities, with one, two and three-month options available.
“We have already launched more products in the last six months than in the previous two years. There is a mutually beneficial relationship between the cash markets, where we list the underlyings, and the derivatives markets, where we are launching new products. Whenever we launch a derivatives product, it enriches the liquidity on the underlying, and we need the underlying to be able to launch the derivative quickly,” said Cerutti, speaking at the beginning of September in between a series of meetings with investors to outline Euronext’s first quarterly results following its IPO in June.
Euronext has also announced plans to become the first regulated market to launch a complete centrally cleared solution for trading exchange for physicals on index futures, starting with CAC40 and AEX index futures in Q1 2015.
As part of its derivatives drive, Euronext has also hired Adam Rose, formerly deputy head of global markets at ABN Amro, as head of financial derivatives, based in Amsterdam, and Olivier Raevel, who has taken on the role of head of commodities, as well as renegotiating its clearing contract with LCH.Clearnet.
Cerruti said that Euronext will not try to compete with larger European derivatives exchanges Eurex and LIFFE on the home territory of rates, but does expect further opportunities to emerge from the G-20-mandated migration of OTC derivatives to central clearing and exchange trading.
“But it’s not just a matter of capturing part of what’s going to come on exchange from the OTC markets, it also makes the listed derivatives that we are expanding more relevant,” he said.