Charlotte Alliot, Head of Institutional Derivatives at Euronext, outlines the development of the Exchange’s new Eurozone Banks Index Future and its wider derivatives roadmap.

Designing new contracts for and with market participants, at a fair cost

Last year was a significant period for Euronext’s Institutional Derivatives business, driven by innovation and flexibility. With the introduction of a new maturity cycle on dividend futures, we were the first exchange to put in place an adapted solution for distribution cancellations. This resulted in an award-winning initiative for our single stock futures and single stock dividend futures, which attracted a lot of interest and helped meet our clients’ needs in challenging market conditions.

Euronext is committed to designing solutions in partnership with market participants, finetuning our contracts to respond to market needs and with a fair cost structure.

An accessible alternative to trade the Eurozone banking sector

As a result of this fruitful collaboration, we were approached by a number of players to design an alternative to trade the Eurozone banking sector using derivatives. We needed an index that was highly correlated with low tracking error, and having conducted simulations and back-testing, we submitted it to a number of market participants for feedback.

The outcome was our new Euronext Eurozone Banks Index Future launched on 7 May, which offers a number of benefits for clients.

Firstly, based on conversations with buy-side firms, we introduced a cap to ensure no single component of the banking sector could account for more than 20% of the index. Market players also told us that they needed a higher contract size than was previously available, so the Eurozone Banks Index Future nominal value was designed to be five times larger than the current market alternative.

Furthermore, the contract includes a block size that is significantly lower to facilitate the transfer of open interest (three lots, approximately €75k) and offers a finer tick size. The rationale for this new and unusual construction was that high block sizes make it complicated to trade upstream for some players.

Finally, and perhaps most importantly, we made sure to offer a fair and sustainable cost structure, as we have already done with our single stock futures and dividend futures. Our solution is approximately 75% cheaper than the current solution on the markets, and the higher contract size also enables clients to achieve economies of scale at the clearing level.

The Euronext Eurozone Banks Index Future went live with five market-makers (BNP Paribas, DRW, Flow Traders, Societe Generale and Tower Research Capital), which is indicative of the strong support we have received from the industry. We have worked with all the major banks to ensure clients will be able to find upstream liquidity, which will be facilitated by the lower minimum block size.

A promising horizon with further derivatives contracts

Looking ahead, we hope to launch additional contracts on the Euronext Eurozone Banks Index Future later this year, and we also plan to launch an option on our Euronext Eurozone ESG Large 80 Index (ESG80) to further strengthen our ESG offering. The ESG80 index is gaining traction, particularly on retail products launched by BNP Paribas in France. ESG is a complex universe but we believe we have taken the right approach and have been working with regulators to ensure the index has the ability to adapt to evolving requirements.

At the end of April this year, Euronext saw another major development by completing the acquisition of Borsa Italiana Group, creating the leading pan-European market infrastructure and the leading venue in Europe for listing and secondary markets for both debt and equity financing.

Borsa Italiana has a very strong derivatives business, combining a dynamic institutional offering with a robust retail franchise. We are excited to work together with our Italian colleagues to offer further innovations and even greater efficiencies to our clients.