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Futurization – this time, let’s get the timing right!

Erscheinungsdatum: 21. Jun 2018 | Eurex Exchange

Futurization – this time, let’s get the timing right!

Thomas Book, CEO Eurex, on new ways to financial stability and efficiency. Part II

The right thing at the wrong time is the wrong thing. It is as simple as that and especially true when it comes to revitalizing futurization. In the first part of this blog, I talked about the opportunities futurization would offer to us all in regard to efficiency and growth. But futurization is a complex project and if you are too early, no one buys into it and if you are too late, everybody has moved on and already forgotten about it. Timing is everything.

Some examples:

Our early launch of CDS futures back in 2007 offered a close to perfect substitute for the then fast-growing OTC CDS market. However, we were unable to succeed at the time because from a structural and distributional point of view we were just too early. Especially due to the dealer-centric price and liquidity formation and the highly profitable institutional business.

Credit Default Swap (CDS)

A credit default swap, also referred to as credit derivative contract, is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract. In return, the seller agrees that, in the event that the debt issuer defaults or experiences another credit event, the seller will pay the buyer the security’s premium as well as all interest payments that would have been paid between that time and the security’s maturity date. A credit default swap is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds.

Other new product developments are just too late to become more than a complementary niche offering. The interest rate swap market is probably a good example here. With central clearing and electronic trading venues, this market has already gained levels of transparency, processing and capital efficiencies, which leave only small but sometimes profitable product niches for exchanges to step in. The OTC market segments have already gained levels of structural and distributional efficiency that make the value-add of a listed substitute very thin for our customers.

In contrast with these two examples, we were just right with the launch of dividend futures. Just after Lehman, it was obviously the right time to migrate the OTC dividend swap market almost completely to a listed, centrally cleared environment.

From a timing perspective, our latest attempt to migrate parts of the asset swap market to our new Total Return Futures (TRF) product line also seems very promising. Changing investment and funding patterns, current funding rate levels and capital costs are supportive to the product. Our latest figures show that we have already captured about 30 per cent of OTC activity in year two after launch.

Going forward, I think that, if we offer products and services that add a value for our customers, get the function, structure and distribution right and consider the timing, futurization will enable us to further attract OTC volume to our platforms. A win-win situation both for us and, more importantly, for our customers who are looking for innovative solutions to increase efficiency and stability.

Lehman Brothers Holdings Inc

Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States, doing business in investment banking, equity and fixed-income sales and trading (especially U.S. Treasury securities), research, investment management, private equity, and private banking. Lehman was operational for 158 years from its founding in 1850 until 2008.On 15 September 2008, the firm filed for Chapter 11 bankruptcy protection following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of assets by credit rating agencies, largely sparked by Lehman's involvement in the subprime mortgage crisis, and its exposure to less liquid assets. Lehman's bankruptcy filing is the largest in US history,and is thought to have played a major role in the unfolding of the late-2000s global financial crisis.