Eurex

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Eurex
Logo eurex.gif
Founded 1998
Key People Andreas Preuss, CEO
Website http://www.eurexchange.com/

An early mover and catalyst in the shift from floor-based to screen-based derivatives trading, Eurex is one of the world’s largest and most diverse derivatives platforms. Volume in its exchange-traded futures and options topped 1.9 billion contracts in 2007, a 25 percent increase over 2006's 1.5 billion contracts.

Products[edit]

Eurex offers a proprietary range of exchange-traded financial futures and options products, as well over-the-counter (OTC) support services for exchange-traded derivatives and OTC services for cash products, such as bonds and repurchase agreements (repos).

Exchange-Traded Products[edit]

Once dubbed "the Bund Exchange" by critics for its heavy reliance on its flagship Euro-Bund futures contract, Eurex has diversified its volume among products in several asset classes.

In 2007, volume in the Dow Jones EURO STOXX 50 stock index futures contract often beat that of the Euro-Bund, and the exchange has beefed up its product mix by diversifying into credit derivatives and single-stock futures (SSFs), as well as by expanding its clearing of OTC instruments.

Until recently, Eurex dealt exclusively in financial products, although it does have an ownership stake in the European Energy Exchange (EEX). EEX members have been able to trade EEX-listed carbon emission reduction products via existing Eurex infrastructure connections since December, 2007.

Eurex co-parent company Deutsche Boerse (DB) began listing Exchange-Traded Commodities (ETCs) in November, 2006. These are securities based on commodity baskets, not futures contracts. Therefore, they are listed on DB’s Xetra securities platform rather than on the Eurex derivatives platform.

The exchange now lists SSFs on roughly 500 of the 600 equities in the Dow Jones STOXX 600 – comprising all shares denominated in euro and Swiss Franc. It also lists options on roughly 280 of the Dow Jones STOXX 600 components.

Eurex exchange-traded financial products fall into eight categories:

1. Eurex fixed income derivatives, which accounted for 731 million contracts in 2006 and 771 million in 2007. The Euro-Bund future remains the highest-turnover product, with volume of 338 million contracts in 2007, up from 320 million in 2006.

2. Volume in Eurex equity index derivatives grew 55% in 2007, from 487 million contracts in 2006 to 754 million contracts in 2007. Volume in futures on the DJ Euro STOXX 50 grew 53%, to 327 million contracts.

3. Volume in Eurex equity derivatives (single-stock futures and options) grew 22% in 2007, from 308 million in 2006 to more than 374 million contracts in 2007. Of that, single stock futures accounted for 52.4 million contracts in 2007, up from 35.6 million contracts in 2006.

4. Eurex Exchange-Traded Funds (ETF) derivatives

5. Eurex volatility index derivatives

6. Eurex money market derivatives

7. Eurex launched the world's first-ever credit default futures on March 27, 2007. These products are designed to act as hedging vehicles against credit events such as corporate defaults, but have so far failed to attract significant volume.

  • iTraxx® Europe 5-year Index series
    • an equally weighted portfolio of the 125 most liquid European investment grade credit default swap (CDS) entities
  • iTraxx® Europe HiVol 5-year Index series
    • an equally weighted portfolio of the 30 entities with the highest spread from the iTraxx® Europe 5-year Index
  • iTraxx® Europe Crossover 5-year Index series.
    • an equally weighted portfolio of 50 European sub-investment grade entities. All iTraxx® indexes are provided by International Index Company Ltd. (IIC).

8 Euro inflation derivatives based on the Harmonized Index of Consumer Prices (HIPC) are scheduled for launch on January 21, 2008. The HIPC measures Eurozone inflation.

Eurex OTC Products and volume[edit]

Eurex also matches, clears, and settles over-the-counter transactions via its Eurex Bonds and Eurex Repo subsidiaries.

Corporate Structure[edit]

Eurex is a joint venture between German exchange operator Deutsche Boerse (DB) and Swiss exchange operator SWX Swiss Exchange. Ownership is split 50/50, but DB receives 85% of Eurex revenues, which amounted to nearly €600 million in 2006. The 85% share of revenues delivered to DB in 2006 amounted 32% of the group's total – second among DB’s five operating structures to the 100% share of revenues delivered by clearing and settlement house Clearstream, which delivered 38% of group revenues.Eurex Structure.JPG

Subsidiaries[edit]

Eurex, despite its affiliation with DB and Clearstream, clears its exchange-traded derivatives business through its own clearing entity, Eurex Clearing AG[1], which was formed to act as a central counterparty (CCP) for derivatives participants and later expanded to include equities.

Eurex does, however, use Clearstream for settlement of Eurex OTC products, such as government bonds and repurchase agreements (repos), which are matched via Eurex subsidiaries Eurex Bonds and Eurex Repo.

Eurex itself owns 100% of the US-based International Securities Exchange (ISE), which was sealed on Dec. 20, 2007, as well as an interest in both the US Futures Exchange (USFE) and the European Energy Exchange (EEX).

Management[edit]

All members of Eurex's management board also sit on the executive boards of of Eurex Zürich AG and Eurex Frankfurt AG. Eurex's CEO is Andreas Preuß, and the other members of the management board are:

Regulation[edit]

In Germany, Eurex is regulated by BaFin (the Bundesanstalt für Finanzdienstleistungsaufsichtthe, or Federal Financial Supervisory Authority), while its U.S. operations are subject to the regulation of both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).

Distribution and Connectivity[edit]

Eurex has screens in 19 countries, among 389 participants.

The system can be accessed primarily via two access plans:

  • Standard Connections, which are used by all Eurex participants
  • Socket-Based Services, which are targeted at the automated trading community and stripped down for speed. Users have the option of taking either the Enhanced Broadcast Solution, which enables direct input into algorithmic trading models, or the Enhanced Transaction Solution, which enables direct output from the trading models to the Eurex trade-matching engine, or both.

History and People[edit]

Eurex was formed in 1998 through the merger of the DTB (Deutsche Terminbörse, German Derivatives Exchange) and SOFFEX (the Swiss Options and Financial Futures Exchange), after nearly a decade of close cooperation between the two entities and their parent companies, Deutsche Börse AG and SWX Swiss Exchange. DTB’s trade-matching engine was built on the SOFFEX model, and the parent exchanges had a memorandum of understanding to create a joint trading and clearing system dating back to 1996.

The formation of Eurex had been announced by DTB Chief Executive Joerg Franke on September 4, 1997, at the Bürgenstock Conference near Luzerne, Switzerland – in the midst of a truly historic period in exchange development.

Battle of the Bund[edit]

The DTB was one of the world's first electronic exchanges, and by 1997 had distributed its screens across Europe and into the United States. As the merger with SOFFEX was being announced, DTB was in the midst of a battle to wrench liquidity in the Bund contract away from its chief cross-continental rival, the open-outcry London International Financial Futures Exchange (LIFFE). On October 22, 1997, the DTB captured 52% of Bund futures liquidity, and never looked back. The incident represented the first time that an existing, established liquidity pool had ever been wrestled away from its home platform, and signaled the beginning of the end of open outcry trading.

That led to a stunning announcement in March, 1998, that Eurex and the Chicago Board of Trade (CBOT) would form a linkage between Eurex and the CBOT's electronic platform, Project A, by the end of the year, with the aim of creating a cutting-edge, electronic trading platform for the leading benchmark derivatives products of Europe and the United States.

The project, however, ran into resistance from the CBOT’s old guard, who saw it as a threat to the trading floor. Although never delivering on its potential, it eventually led to the launch of a/c/e (alliance/cbot/eurex) in August, 2000.

By May, 1998, the first release of the new Eurex software was up and running, and by September all trading, clearing, and settlement mechanisms of DTB and SOFFEX had been completely merged.

Eurex Release 1.0 included a multi-currency clearing facility to accommodate the impending introduction of the euro. In addition to existing DTB and SOFFEX products, Eurex listed futures on the Dow Jones EURO STOXX 50 stock index, which had been developed jointly between Deutsche Boerse, SWX, and Dow Jones as part of a failed cooperative venture between DTB, SOFFEX, and the French futures exchange MATIF, which eventually folded into Euronext. Indeed, MATIF and DTB launched virtually identical Stoxx derivatives products at the same time, but Eurex captured the volume while Euronext was concentrating on assimilating new exchanges and consolidating its trading platforms.

Eurex also added options to its futures on the Euro-Schatz, the three-month EURIBOR, and the Euro-Buxl. Volume that year topped 248 million contracts, and membership hit 313.

In 1999, Eurex began an offset program with Helsinki Exchange Group Ltd. (HEX, today part of OMX), that made Scandinavian indexes and equities available to Eurex members and gave HEX members access to Eurex products. Volume grew to roughly 380 million contracts, while membership topped 400.

In 2000, Eurex beefed up its equities product range, adding futures and options on sector indexes of the pan-European Dow Jones EURO STOXX 50 and Dow Jones STOXX 600 indexes, as well as equity options on non-German components of both. In October, it launched Eurex Bonds and Eurex Repo for trading over-the-counter (OTC) government bonds trading and repurchase agreements (repos).

Behinds the scenes, however, there was friction between Franke and Deutsche Boerse Chief Executive Werner Seifert, leading Franke to announce his resignation in August, 2000 – the same month that a/c/e debuted. Departing with him was co-managing director Andreas Preuss, who had been coordinating the effort to build a/c/e in Chicago. Preuss later returned to Eurex as Chief Executive.

Ferscha Era[edit]

Franke was followed by Rudolf Ferscha, a mergers and acquisitions specialist and former non-directional trader who took the reins in December, 2000. Frustrated with direction of the a/c/e project in Chicago, he changed the direction of Eurex’s expansion into the United States, culminating with the 2004 formation of Eurex US.

He also continued to expand the international stock option offerings in Frankfurt, and was able to capitalize on hardware glitches in the Amsterdam segment of cross-continental rival Euronext to gain a leading position in Dutch options for a time.

Several projects that had been initiated on Franke’s watch bore fruit on Ferscha’s – for example, the launch of the European Energy Exchange (EEX) in March, 2000. That exchange eventually merged with Leipzig Power Exchange, keeping the EEX name, but Eurex maintains an ownership interest.

But media attention focused on Ferscha's falling out with CBOT leadership and renewed competition from LIFFE, which had introduced a credible electronic trade-matching engine, LIFFE.Connect, after shuttering its trading floors.

Eurex’s medium-term interest rate product, the Bobl futures contract, was perceived as vulnerable due to a limited supply of deliverable five-year German bonds, which made it possible for deep-pocketed banks to gobble up available deliverable supplies and squeeze the market at delivery time. Eurex responded with fines, but did not change the contract. In the end, the German Federal Bank, the Bundesbank, agreed to make other deliverable bonds available in the event of a squeeze, and the threat faded. LIFFE’s rival product, Swapnote, found its niche, but never threatened the benchmark status of the Bund or Bobl.

With European unification approaching, the Dow Jones EURO STOXX 50 futures contract was gaining on the DAX in volume terms, supported by a growing number of options on non-German shares that were also components of the index. The exchange also added options on US shares that year, but Ferscha bucked the global trend towards single stock futures – repeatedly dismissing them as a niche product, and saying that there was simply no demand from market participants.

Divorce, Chicago Style[edit]

By the end of 2001, Eurex and CBOT had formally entered a dispute resolution process, with Eurex charging that the CBOT had violated their agreement by not paying for a software upgrade and balked at allowing US options onto a/c/e.

In 2002, Eurex introduced futures and options on exchange-traded funds (ETFs). Overall volume on all Eurex products topped 800 million contracts - but the big story continued to be Ferscha's ongoing feud with the CBOT old guard, which heated up even as volume migrated to the a/c/e platform.

By year-end, the CBOT was threatening to dissolve the a/c/e project in favor of implementing the Liffe.Connect trading platform.

In January, 2003, CBOT made good on its threat, and Ferscha announced plans to launch a rival exchange as soon as the a/c/e agreement expired. Over the course of the year, Ferscha cut a deal with the former Chicago Board of Trade Clearing Corporation (BOTCC, since renamed simply the Clearing Corporation) to clear trades for the new exchange, but also faced intense lobbying on the part of both the CBOT and the Chicago Mercantile Exchange against his efforts to gain regulatory approval as a non-American exchange.

Meanwhile, Deutsche Boerse AG and SWX renewed the Eurex joint venture for another decade, and Eurex continued to add new products – most notably futures and options on the reference rate for overnight money, EONIA (European Overnight Index Average). Volume for the year crossed the one billion contract threshold in December, and finished at just above 1.014 billion.

The Chicago exchanges managed to stall the launch of Eurex US until February, 2004, which meant there was a one-month gap between the time the CBOT transferred its products to the Liffe.Connect platform and the time Eurex US launched on the Eurex platform.

Eurex US has never managed to achieve significant volume, but its arrival in the United States is credited with forcing the Chicago exchanges to abandon their outdated business models and shift to electronic trading. Meanwhile, Eurex itself has continued to thrive. Volume in 2004 topped 1.066 billion contracts.

Seifert Ousted[edit]

2005 was another pivotal year for the exchange, as shareholders ousted Deutsche Boerse AG Chief Executive Werner Seifert. For Eurex, it eventually meant the ouster of Ferscha and the introduction of single stock futures, as well as the downsizing of Eurex US.

After Seifert’s ouster in May, 2005, Ferscha’s business plan came under increasing pressure. In September, he announced the introduction of single stock futures, and in October he said he was “open to offers” of partnership or takeover on the Eurex US platform.

Also in 2005, the joint venture agreement governing Eurex was adjusted to give Deutsche Boerse 85% of the income from Eurex, and the exchange began expanding its distribution in Asia. Numerous memorandums of understanding (MoUs) with Asian exchanges were signed, and the groundwork was laid for direct access for Singapore-based traders, which finally bore fruit in 2006.

On the product front, Eurex introduced its volatility index products. Despite the turmoil, Eurex remained a critical profit center for Deutsche Boerse AG, and trading volume increased again, to more than 1.25 billion contracts.

On April 19, 2006, Ferscha resigned, and by month-end the Eurex board had approved a plan to let another exchange take a stake Eurex US, but named no takers.

Preuss Era[edit]

Ferscha's departure heralded the return of Andreas Preuss, who had been co-managing director under Joerg Franke. Preuss vowed to focus more on new product development, technology, and global distribution geared towards high-speed algorithmic trading.

Early product introductions, however, involved projects begun under Ferscha: LAUNCHED BEFORE HE LEFT weekly options, futures and options on the MDAX and SMIM, and futures and options on Spanish and Swedish underlying products. In July, 2006, Preuss announced the return of another DTB veteran, Brendan Bradley, who became Global Head of Product Strategy in August.

On October 1, 2006 - less than six months after Ferscha's departure - Eurex sold 70% of Eurex US to Man Group, which changed the name to the US Futures Exchange (US FE).

Eurex volume that year topped 1.5 billion contracts.

In January, 2007, Heike Eckert took responsibility for management of Eurex activities in the United States, where the exchange maintains offices in Chicago and New York.

In March, Eurex launched its long-awaited credit derivative futures, based on three credit default indexes. The products attracted much fanfare, but little volume.

In April, Eurex announced it was launching a series of new emerging-market derivatives, led by cash-settled, dollar-denominated futures based on the RDX extended index (RDXxt), which is calculated by the Wiener Börse AG (Vienna Stock Exchange) and contains the 15 largest Russian depositary receipts (DRs) traded on the London Stock Exchange (LSE). That same month, it announced single-stock futures on all 15 index constituents, bringing its SSF offering to 370.

Back in the USA[edit]

The big news of the past year, however, came on April 30, 2007, when Eurex and the International Securities Exchange (ISE) announced the merger of ISE into Eurex - a deal that was completed in December, 2007.

Recent Milestones[edit]

  • January 2007 Eurex launches inflation-linked futures.
  • March 2007 Eurex becomes the first exchange to introduce credit default futures.
  • November 2006 Eurex adds Spanish and Swedish equity options to its product blend, giving it 49 of the Dow Jones EURO STOXX 50 components and 99% of the market cap.
  • August 2006 Eurex passes the one billion contract mark two months earlier than it had in 2005.
  • August 2006 Eurex signs its first Singaporean member firm, Transmarket Group Pte Limited.
  • April 2006 Eurex becomes the first European exchange to introduce weekly options. The debut products are the DAX, the Dow Jones EURO STOXX 50, and the SMI.
  • October 2005 Eurex begins offering single stock futures.



Resources[edit]

Eurex Web site [1]

Deutsche Boerse Annual Report 2006 [2]

http://www.eurexchange.com/download/documents/publications/Eurex_1999_2008.pdf

References[edit]

Press release announcing link between Eurex and CBOT: http://www.eurexchange.com/about/press/press_32_en.html