Eurex Exchange: Index Total Return Futures (TRF)

Listed solution for implied equity repo trading via EURO STOXX 50® Index Total Return Futures (TESX)

Index Total Return Futures (TRF) are designed to offer a listed solution for trading the implied equity repo rate. Index TRFs aim to replicate the payoff profile of an Index Total Return Swaps (TRS) in a cost efficient way. The first TRF product launch will be the EURO STOXX 50® Index Total Return Futures (Product ID: TESX). This future will allow to:

• Provide cost-efficient access to the total returns of Europe’s benchmark blue chip index whilst hedging the implied equity repo rate.

• Mitigate capital costs and collateral usage and the envisaged bilateral margining charges for non-cleared derivatives.

• Benefit from mitigation of counterparty risk with central clearing and margin offsets with listed equity index products.

Key benefits

• Fully fungible product aiming to provide cost-efficient access to the payoff profile of equity index TRS.

• Uses standardized trading convention – TRFs trade as a Spread expressed in basis points (+/–).

• Approximately 5 years exposure available via a single TRF product allowing single trades and calendar spreads.

• Price discovery and liquidity provided by market makers via the Eurex T7 trading system.

• Offsetting margin effects for Index TRF Equity Index Futures and Dividend Derivatives within the Listed Equity (Index) Derivatives Liquidation Group (PEQ01).

How they work

• Daily cash-flow structure with distributions and funding realised daily via the TRFs variation margin.

• TRF executed in spread in basis points via the order book or Trade Entry Services is automatically converted to determine the futures price in index points within T7 system.

• Order entry and execution is based on the TRF Spread which is determined by the implied repo rate.

• Order book and off-book trading within the Eurex T7 trading system via two trade types :
  • Trade at Index Close (TAIC) with an equity strike level based on index close (e.g. EURO STOXX 50® Close).
  • Trade at Market (TAM) based on custom-defined equity strike level provided by the investor.

TRF versus TRS

 The new TRF futures contracts aim to replicate the payoff profile of an equity index TRS:

 TRF contracts will represent the theoretical exposure to the underlying index (i.e. its component basket) at trade date assuming holding to expiry.

 The holder of a long position will additionally receive the distributions associated with holding the cash basket, against which they will pay the financing associated with this purchase.

 The financing cost of will be made up by the overnight benchmark/funding rate (Eonia®) and additionally the traded TRF Spread. This spread represents the additional repo rate required by the seller over Eonia® rate to expiry.

 The payoff TRS structure comparison with the structure for Total Return Futures is: