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Eurex Exchange: Index Total Return Futures (TRF)

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).

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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:

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-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.

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

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Next Finance December 2016

Article also available in : English EN | français FR

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