The escalating rivalry between Eurex and Intercontinental Exchange opened a new front on Monday as the European exchange and ICE Futures US launched on the same day their first MSCI total return futures.

On March 11, Frankfurt-based Eurex launched total return futures based on the MSCI Emerging Markets, MSCI EAFE (Europe, Australasia and Far East) and MSCI World Indices, and ICE Futures US launched TRFs based on those three indices and the MSCI USA.

Total return futures are an innovative exchange-traded version of the total return swap which have proved popular among hedge funds by replicating the performance of an index, including its income and capital gains from dividends and overnight lending in the repo market.

Total return futures are also proving increasingly popular as regulation such as the uncleared margin rules has made swaps more expensive compared to their listed equivalents.

The coincidence of the launches is linked to the history of these products at the two exchange groups.

Eurex launched its first total return future (TRF) based on the EuroStoxx 50 index in December 2016 and that product has emerged in recent years as the world’s most-traded TRF, with 9.2 million lots traded last year, according to FOW Data. The German exchange followed this with a FTSE 100 TRF in March 2021.

ICE Futures Europe, based in London, launched ICE’s first TRF, also based on the FTSE 100, in November 2022, effectively giving Eurex an 18-month head-start with its FTSE product.

Today, Eurex is the market-leader in the FTSE 100 TRF, trading over 600,000 lots last year compared to fewer than 20,000 contracts traded at ICE, according to FOW Data.

The TRF market has gone that way despite ICE Futures Europe being the home of the FTSE 100 index future, trading 31.6m lots last year compared to 250,000 contracts traded at Eurex, according to the exchanges.

Based on its experience with the FTSE TRF, ICE does not want to give Eurex a headstart again in MSCI, where both ICE and Eurex have vast futures and options books based on the main MSCI indices.

Caterina Caramaschi, vice president, Financial Derivatives, at ICE, said on Monday: “ICE’s markets account for over 70% of global MSCI futures trading by volume, making ICE the natural home for customers to trade MSCI total return futures alongside our deeply liquid suite of MSCI futures.”

Eurex, by contrast, is focusing on its success in TRF, as Stuart Heath, Director Product Design for equity and index derivatives at the European exchange, told FOW: “Everybody knows MSCI futures but the total return futures in Europe are mainly in EuroStoxx so the reaction has been a cross between interest in the product and then going further to try to understand the mechanics of the product.”

Heath added: “Because we have 100+ billion of open interest in our total return futures already, there’s a lot of confidence in the Eurex product, experience on the operational side and there’s a lot of product to cross-margin against. That is a benefit for the broker-dealers and they are going to be pricing this based partly on their collateral and capital optimisation.”

ICE and Eurex are offering cross-margining opportunities between the new MSCI TRFs, their MSCI futures and other TRF products, which should make the new products cheaper and more attractive to buy-side clients like hedge funds.

ICE and Eurex are also offering incentive schemes to encourage early liquidity in the contracts though Heath is expecting measured adoption.

He said: “We announced the timing because it sits within our pattern but we are coming into roll week so we don’t anticipate anything in the first few weeks in terms of initial volumes.”

Heath added: “The MSCI total return future is aimed at buy-side clients as an alternative to total return swaps. As a buy-side product, it is going to have a longer sales cycle whereas the EuroStoxx product was far more a sell-side to sell-side product. When we go to the buy-side, they might say I have a swap that rolls off in June or November so it is going to be that sort of process.”

ICE feels its TRF has an advantage over the Eurex product in that it trades in the US in line with US trading hours. The Eurex product trades from 13.30 London time (08.30 Eastern Time) to 21.00 London time (16.00 Eastern).

Caramaschi said: “We have worked directly with the market to design the TRF contracts, which allow clients to benefit from trading in a US time zone, against the closing MSCI index level and report the trade on the same day, utilising the truly global nature of ICE’s equity derivatives offering.”

Heath responded: “The ability to mark to the cash index close isn’t necessarily what the swap market does, the swap market tends to be a strike tomorrow market, because the underlying cash indices being global in nature have different peculiarities.”

He said many of the MSCI emerging market index constituents are in Asia so there is missing price information in the cash index.

Heath added: “As we see with MSCI futures today, the trades are often put in the next day so is the ability to market to the cash index an advantage? I don’t think so.”

Eurex said when it announced on February 7 its plan to launch the MSCI TRFs that European and Asian trading sessions will be added later this year.

Heath gave an update: “We don’t have all the internal approvals but we hope to do that sooner rather than later this year. The nuance is that, because we look at this as a US dollar product, for the Asian hours and European morning, we won’t be able to roll forward the funding amount because we won’t have had a new day of US interest rates, so the morning session will have in effect a different funding level to the afternoon session when we update the funding based on the overnight rate.”

Heath added: “A lot of MSCI trading is done out of European desks, so they will be able to put trades on in the European morning based on the previous day’s close rather than wait for the afternoon.”

The ICE and Eurex MSCI TRFs are the latest example of heightened competition between the exchanges after Eurex re-launched in November its Euribor contract in a direct challenge to ICE’s dominance in the largest European derivatives market.

ICE, Eurex and CME are also scrapping in the nascent Euro short-term rate futures market which trades the risk-free rate alternative to Euribor.

As Heath said, the MSCI TRFs could be a slow burn but the simultaneous launches should negate any first-mover advantage. For what it’s worth, Goldman has backed the ICE product.

“Goldman Sachs is excited about the launch of ICE MSCI Index TRFs. We expect it to be an excellent product for clients seeking a cost-effective solution to access a range of flagship MSCI indices,” said Daria Sentuc, managing director, Emerging Markets Global Synthetics at the US investment bank.

“As a long-established provider of liquidity across the MSCI complex, we look forward to supporting growth in this new product,” Sentuc added.