The new futures contract design is aimed at replicating the payout profile of the funded purchase of a cash equities basket representing the components of the underlying index.
The total return futures will trade in ‘spread’ in basis points and allow the implied repo rate associated with cash basket replication to be traded for the first time.
Basel III capital standards are already increasing the cost of over-the-counter (OTC) trades and new rules for non-cleared that are likely to come into force next year will encourage a move to exchange-traded derivatives.
"The product is launched ahead of the bilateral margin rules on non-cleared swaps which are likely to be introduced in Europe in early 2017,” commented Mehtap Dinc, global head of derivatives product development at Eurex.
“We therefore expect market participants to cut back on their OTC swap positions and instead choose futures to meet their trading and hedging needs in the months to come.”
Total return futures will offer returns analogous to total return swaps, added Dinc, making them a functional replacement.
The new swaps will also bring the additional benefit of standardisation, which allows netting. Eurex Clearing acting as central counterparty will also mitigate counterparty risks.
Régis Lavergne, deputy global head of equity derivatives in charge of trading activities at Natixis, expects larger market participants to adopt the new total return futures, “and the transparency and fungibility they provide, to meet their hedging needs in the months to come”.