Euronext hosted in January 2023 the first Euronext Markets Insight conference in the impressive Pavillon Elysee on the famous Avenue des Champs Elysees in Paris. The Euronext Markets Insight Conference was the Group’s first of a series of European conferences dedicated to Derivatives, Index and ETF activities.

After earlier discussing the macro-economic forces affecting the European economy, the final panel looked at the mechanics of European’s dividend futures contracts which have become popular in recent years.

The Euronext dividend futures offer the hedging coverage of the over-the-counter dividend swaps with the more efficient capital treatment of exchange-traded products.

Charlotte Alliot, Group Head of Institutional Derivatives at Euronext, said the exchange’s dividend futures first came to the fore in 2020 when dividends were cancelled in response to the rapidly escalating Covid pandemic.

Gabriel Messika, Head of Index Forward Trading Europe at JP Morgan, said Euronext was in the right place at the right time with its dividend futures which first came to market in 2017.

He said: “Before the financial crisis, it was not much of a concern but, little by little, there was a lot more volatility and a lot more risk coming into this market. So, with the launch of futures by exchanges such as Euronext, through the crisis and the volatility around earnings and the dividends being paid by companies, the market has grown significantly.”

Messika said that, while these products were initially traded by the banks, now they also have a broader following among the buy-side.

 “Similarly, the range of investors using dividend futures has grown significantly, including active and passive fund managers. What is different about this product is that it allows investors to take a direct exposure to the specific earnings of companies.”

Alliot added: “From the exchange’s perspective, what is pleasing is that while there was a need from the banks at the outset for obvious reasons, now we are seeing asset managers active in the market but now we have futures and they are very effective.”

One active trader of dividend futures is Benjamin Clerget, Portfolio Manager at Hudson Bay Capital, who said dividend futures offered in last year a safe-haven in an otherwise tough market.

Clerget said: “If you look at the expectations for this year of dividend payments by European companies, it is up 10% compared with the beginning of 2022 while most indices in Europe are down 10-20%. So it shows that you can create some alpha while diversifying your asset class.”

Cedric Baron, Head of Multi-Asset Strategies at Generali Investments, said the Euronext dividend future has some attractive characteristics.

“For us, in our portfolio, we see this product as a vehicle to capture beta. What is interesting with this product, which is a buy-side equity product, is that it is priced somewhat like a bond. The dividend future and the dividend swap are the same - you have the value of the future today and you have the value of the dividend you will receive at some point in a specific year and over time they will converge towards this value. So you get a carry with this kind of product.”

And traders have become much better at trading these contracts in just a few years.

Clerget said: “The critical risk for dividends came in 2020 when the ECB decided to ban dividend payments for banks which I think was a mistake at the time. But it is a risk that you bear when you invest in the asset class because the dividend can go to zero long before the share price. This is why dividends deserve a risk premia that creates alpha or improves your beta.

“Dividends tend to trade lower than the expected level hence the interest in the asset class because of the risk premia and because of the flows,” he added.

Baron said investors are becoming more mindful of the threat to company dividends: “Since the Covid crisis there has been a lot of discussion about dividends and they are now well-appreciated by people so today there are risks with dividends but there are also opportunities for investors in the long-term and traders looking more at the short-term and the options markets.”

Messika said that, while traders have become more adept at using these products, the markets today present a set of challenges that have not been experienced for a generation.

“Most derivatives traders only know the market with low interest rates and low inflation and I don’t think any of us have experienced a market with high inflation. So this is a new world for us and for derivatives traders.”

Messika continued: “My view is that I am happy that we enter this new world with such a liquid market as I am sure there will be more hedging and investment. As we have already said, dividend futures offer a better way to hedge inflation and there are many opportunities and new players that we expect to come into the market with the changes that we are facing.”

But Clerget told the delegation the banking industry is now better organised to deal with market shocks than it was just three years ago.

He said: “We were all traumatised by the dividend ban in 2020 but today the banking sector is very different in terms of risk on balance sheet. There are lots of buy-backs and it is one of the very few sectors to improve its profitability so it should be a rosy outcome for the shareholders of banks.”

Clerget concluded: “In Europe dividends are paid on earnings of the year before unlike in the US where dividends follow the earnings of the company. Dividends in the banking sector this year are going to be at least 25% while the share prices are down which shows the break between the earnings and the share price. So going forward I would say it is a good investment to invest in banking dividends.”