As several new trends impact investment in Asia, Randolf Roth and Mezhgan Qabool discuss how Eurex is catering to the evolving needs of market participants and what it sees happening next
Investment in Asia is undergoing enormous change. The notable rise in individual investors – many of which want to participate actively in growing economies and improve pensions frameworks – alongside a growing appetite for investment based on environmental, social and governance (ESG) criteria, is leading the demand for new products that support these overarching objectives.
At the same time, China continues to exert a huge influence on the region, attracting both domestic and overseas investors wanting exposure to its enormous economic growth. The growth of cryptocurrencies is another trend to which investors and exchanges are exposed, alongside the steady shift from bilateral to exchange trading that is being encouraged by regulation worldwide.
All of these trends are creating a demand for new exchange-traded products in Asia. Randolf Roth, an executive board member of Eurex, and Mezhgan Qabool, an Asia-based executive director at Eurex, talk about how the exchange is adapting to these changes and what it expects next.
Individual investments have surged in recent years. How is Eurex adapting to this client segment globally, and especially in Asia?
Randolf Roth: This year we rolled out our global initiative, which is based on our ongoing detailed analysis of this market segment in Asia, the US and Europe. Some 20% of traded products globally now come from individual investors and, in countries such as India, mainland China and the Republic of Korea, individual investing is vast and makes up a substantial part of the liquidity. Legislators and regulators worldwide seek to create financial markets that work for all people, including individual investors. In this endeavour, Eurex strives to support these legislative ambitions, to increase the participation of individual professional investors and provide a trading platform in as safe a way as possible. One element of that is to extend financial literacy by offering investors relevant research and data they can use to make educated assessments as they expand their portfolios into new products and regions. While individual investors cannot be members of Eurex, direct market participants of Eurex support this endeavour. For example, key brokers are disseminating the educational materials to individual investors, complementing information they already provide to them.
We’ve also launched micro products, including the Micro-Euro Stoxx 50® and Micro-Dax® Futures. These contracts are 10 times smaller than the regular products and five times smaller than the mini products, giving more trading participants the opportunity to hedge and gain exposure to the European benchmark indexes with low contract values and low daily margin rates. The contracts are available 21 hours a day, opening at 08:00 Singapore and Hong Kong time, and trading until the Europe close at 22:00 CET. Open interest and volumes in these two micro products have surged this year. We have traded more than 2 million contracts since launch, and daily average volume across both products as of November 2021 was 20,989 lots up from 1,295 in April 2021. Meanwhile, open interest on both contracts had reached almost 5,000 contracts by mid-November.
As an offshore derivatives exchange, it is crucial we work with local partners in Asia to reach end-clients. In 2021, we held more than 50 educational events through joint efforts with partner brokers and external educators.
Furthermore, in the Republic of Korea, we’ve had a co-operation in place with the Korea Exchange (KRX) since 2010, under which we make derivatives based on the Korea Composite Stock Price Index (KOSPI) fungible and tradable on Eurex. At the end of the Eurex trading day, the KOSPI positions are transferred back to KRX to allow for around-the-clock trading of KOSPI derivatives. As is typical for the region, individual investors traditionally have high participation rates in those financial markets. Around 50%–60% of volumes in these products are by brokers catering to individual investors.
The specific products are the Eurex Daily KOSPI 200 Options, the Daily Mini KOSPI 200 Futures, the Daily KOSPI 200 Futures – which have seen exponential growth this year – and the Daily US dollar/Korean won FX Futures, which we added on July 26, 2021. Eurex is now the only global exchange to offer these products after hours. More than 282 million contracts have traded on the Eurex/KRX Link since inception.
In November, average daily volume in Eurex Daily KOSPI 200 Options increased 11% month-on-month to 84,800 contracts. We will further add the KOSPI 200 Weekly Options on the joint link in the first quarter of 2022.
This client segment will continue to be a focus for us in Asia. Many individual investors now come from a younger generation who are trading for their futures with a more long-term outlook. As a result, we are looking to develop a new product road map that will also cater to their investment needs, as well as educational programmes via broker partners to ensure an investment decision-making process embedded in a framework of safeguards and controls at each step involved in trading, and to ultimately benefit from the high-quality market transparency and integrity of an exchange.
How is Eurex catering to the rise in ESG investing and how do you expect ESG investing to develop in Asia?
Randolf Roth: The bulk of participation in ESG products, as well as the push for us to list them, still comes from Europe. However, Asia’s appetite for ESG products has started to grow. Currently, there are limited Asia-specific derivatives offered by local exchanges in Asia, and the amount of ESG exchange-traded funds (ETFs) listed is very limited. This results in Asia-Pacific (Apac) investors looking to the global exchanges for ESG solutions.
Eurex was the first exchange to offer ESG products, starting in 2019 when we listed Stoxx® ESG derivatives on various products, and Eurex is now seen as the market leader. The ESG product with the most open interest and volume is the Stoxx® Europe 600 ESG-X, which is based on an exclusion methodology. This is a simple and efficient product that excludes companies based on criteria specified in the methodology. For example, it would exclude any company in breach of the UN Global Compact Principles or firms involved in the production of tobacco or controversial weapons.
We now have 23 index futures and options and two new fixed income ESG futures listed. In November 2021 we added the weekly options of the Euro Stoxx 50® ESG.
Our partnership with MSCI is particularly relevant in Asia as we list the MSCI Emerging Markets (EM), MSCI Japan (the screened and enhanced focus version) and the MSCI EM Asia screened.
In Asia, investors tend to look either for liquid products or very specific strategies. Carbon has become a particular focus, and this is why we also launched the MSCI ESG Enhanced Focus line up composed of five indexes (World, EM, the US, Japan, Europe). The index aims to reduce the carbon footprint versus the parent index by 30% through a combination of exclusion criteria, ESG scoring and weight reshuffling.
Within the Apac region, we see the most traction for our ESG products in Australia, New Zealand, Japan and Singapore. For the rest of Asia, certainly compared with Europe, banks and asset managers are still in the exploration mode of integrating ESG derivatives into their investment strategies.
In Australia particularly, ESG is already a key part of most asset owners’ strategies and a few superannuation funds are already active on Eurex ESG products. This could be because of regulation pushing superannuation funds to adopt more ESG strategies, but it is also a reflection of the younger generation choosing where they want their money invested.
Given some of the fragmentation on regulation and transparency of ESG frameworks in Apac, asset managers and funds are driven to trade European benchmarks to diversify their portfolios and strategies in ESG in a mature environment where there is a consolidated, well-developed taxonomy and standardised regulation.
Liquidity also plays a key part. On the Eurex ESG products – which include Stoxx® Europe 600 ESG X, Euro Stoxx 50® ESG, MSCI EM Asia ESG and MSCI USA ESG screened – traded volume in 2021 is at 2.2 million contracts, with notional open interest of over €5.19 billion, with healthy order book liquidity.
When it comes to the MSCI Asian Underlying Futures, Eurex MSCI EM Asia, launched in September this year, has already gathered €240 million in open interest. This is in addition to MSCI EM holding €133 million and MSCI Japan, which also exhibits activity. Eurex is the market leader in Asian ESG derivatives ranked by open interest.
Given the momentum in Asia, Eurex plans to extend the trading hours of its ESG products in the Asia time zone from 14 to 21.
We will continue to work closely with our clients in Apac, as well as partners, regulators, associations and universities to share knowledge and foster innovation and solutions. ESG is a global focus, and we all benefit when we collectively succeed here.
How can Eurex help global investors hedge their China risk and gain better domestic access?
Mezhgan Qabool: Although China is taking great strides towards making the market more accessible to international investors, including with the recent consultation on the draft China futures law, there are still a lot of limitations in place that make it challenging for foreign investors to hedge their exposures. These limitations might be daily price limits, position limits or the shorter trading hours of the domestic markets, not to mention political and regulatory changes resulting in quite big price swings.
Eurex has nine futures and options with China market exposure designed to help global investors better risk-manage their exposure. We work with international clients outside of China, but we have also cultivated strong joint venture partners in China.
On the products, MSCI Hong Kong Listed Large Cap and MSCI China Hong Kong Listed Large Cap indexes were listed as a solution for the US Executive Order, under which certain Chinese securities are banned from being traded by US persons.
The most effective hedge has proved to be the MSCI China Futures, which was listed in September 2021 to replace the MSCI China Free contract. Eurex has an 89% market share and more than $2.7 billion notional in this contract and we see it continuing to grow.
The most liquid MSCI product on Eurex is the MSCI EM Asia index, which captures large and mid-caps across nine emerging market countries in Asia. China comprises a whopping 44% of that index. The average daily turnover is around $946 million and open interest stands at $22.7 billion. Eurex has 65% of the market share for this index and about 31% on average trades in Asian hours.
We also have partnerships around China. Eurex’s parent company, Deutsche Börse Group – which has offices in Beijing – has a memorandum of understanding in place with China’s International Institute of Green Finance, with a heavy ESG focus. We work to educate potential investors and analyse, with Qontigo, the potential for developing a China-specific underlying index.
Furthermore, we have a joint venture with the domestic exchanges, including the China Financial Futures Exchange and the Shanghai Stock Exchange, to create the China Europe International Exchange (CEINEX). We jointly work to expand China exposure globally and equally expand European exposure to domestic China investors by creating better risk management and hedging solutions.
What impact do you see futurisation and uncleared margin rules (UMR) having in Asia?
Randolf Roth: Since its inception in 2016, the first four phases of UMR impacted just a small number of firms. However, phases 5 and 6 are likely to impact more than 1,000 firms on initial margin requirements. These UMR phases can impact many market participants such as asset managers, hedge funds, corporates and pension funds.
Driven by market demand as a result of regulatory changes, the market has been welcoming futurised swaps, which deliver margin optimisation and cost efficiency. Eurex was the first exchange to explore futurisation in 2008, with listing of the dividend futures on the Euro Stoxx 50® Index, which has grown exponentially, and subsequent listing of Euro Stoxx 50® Index Total Return Futures, Euro Stoxx Banks Index Total Return and FTSE Total Return Futures.
In 2013, Eurex identified MSCI derivatives as another growth area for the futurisation of swaps. Many asset managers in Asia are using MSCI indexes as their benchmark, but have been limited to swaps, cash baskets and ETFs to replicate those indexes. With the availability of listed futures and options, we see more buy-side firms utilising Eurex MSCI derivatives, which have attracted around $140 billion in notional open interest.
UMR means that exchanges and clearing houses have a duty to provide the necessary solutions or new product listings that the markets are going to need. We believe the combination of transparent, regulated listed markets and our Prisma margin methodology creates a very competitive, transparent and cheaper alternative to the swaps markets.
Cryptocurrency is a hot topic in the financial industry. How is Eurex participating in it and what can its customers expect?
Mezhgan Qabool: Cryptocurrency has indeed gained increasing attention in recent years, from individual and institutional participants, and has also won our attention.
This is why, following the successes of the cryptocurrency exchange-traded notes (ETNs) listed on Xetra, Eurex launched Europe’s very first regulated bitcoin-based futures on September 13, 2021. The contract is based on Xetra’s most successful bitcoin ETN, is centrally cleared and benefits from risk netting and a robust margin system. Because it is managed within the Eurex ecosystem, it is also subject to the regulatory safeguards we have in place.
We strongly believe liquidity will grow with increasing demand and that it will eventually encourage institutional investors into the market.
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