Longer trading day will require operational adjustments at member firms
In yet another sign that derivatives markets are becoming increasingly global in nature, Eurex is planning to extend the trading and clearing hours for some of its flagship equity index and fixed income futures contracts. The exchange says the extension will provide new and existing customers in the Asia-Pacific region with access to those products during the whole of the Asian trading day.
According to a notice to members posted on May 14, the exchange plans to open these contracts for trading and clearing at 8 a.m. Singapore time. That will be 1 a.m. Central European time at launch at the end of the year, and 2 a.m. when daylight savings is in observance from March to October.
Michael Peters, deputy CEO of Eurex, noted that Asian investors are already participating in Western exchanges even at unconventional hours.
“We see spikes in trading that coincide with Korea’s night session, and even see strong activity from Asian investors when Wall Street opens in New York, which is after 9 p.m. in Hong Kong Time,” Peters said. “I have to admit, I was pleasantly surprised to see that Korean investors are awake that long to wait for market events during the night, but that just goes to show how connected global markets are at present."
The contracts expected to be available during the extended hours include the Euro Stoxx 50, Dax, Mini-DAX and MSCI equity index futures; the Euro Bund, Euro Bobl, Euro Schatz and Euro Buxl fixed income futures.
Before making the decision to extend the trading day, Eurex conducted a market outreach program to identify potential customers in the Asia-Pacific region. For example, Peters noted that institutional investors in Australia, Japan and Singapore are currently using proxy instruments such as Treasury futures and E-mini S&P futures to hedge European-focused portfolios because Eurex is not open during the early part of their trading day. Once the new hours take effect, those customers will be able to use the interest rate and equity index products listed on Eurex for a more precise hedge, he said.
“They told us they would really be interested to use the appropriate hedging instruments in order to hedge their Euro-denominated portfolios” Peters said.
Another potential set of customers are banks active in the structured products market, particularly in Hong Kong and Korea, as well as hedge funds and proprietary trading firms looking for cross-market opportunities, he added.
Market makers are another important part of the ecosystem. Peters said the exchange is striving to ensure liquidity during the early morning hours by signing up a minimum of three market makers for every product that will be listed.
The shift will create some challenges, however, for the brokers who provide access to Eurex and the clearing firms that process the trades. Eurex will be using its existing infrastructure, T7 for trading, Prisma for risk management and C7 for clearing architecture, so there is no need for member firms to establish new connections or adapt to new messaging protocols. But with the introduction of longer hours, the member firms will need to have staff and systems up and running much earlier in the day, and certain practices for handling trades will have to change.
For example, Eurex members typically restart their systems once a day, during the time between the close of the previous trading day and the start of the new one. Once Eurex moves to the new hours, firms may have to switch to a weekly restart, as is the practice with CME Group.
The move is well worth any short-term inconveniences, however, given the current global market environment, said Ian Nissen, APAC Head of Futures, Clearing and Collateral at Citigroup.
“It’s a very timely and sensible move by Eurex. Like any new market initiative, it may take a while for this to get traction, but there’s a lot of potential demand,” Nissen said. “Many of our customers in the APAC region are already accustomed to trading in the U.S. markets more or less around the clock, so this should open up more opportunities for cross market trading.”
Extended trading hours are not new to the futures markets, of course. For example, CME's markets are open for 23 hours a day, and most global firms have established processes for running their systems to cover as long a time frame as possible.
As a result, many firms have already made a switch to around-the-clock operations and can easily participate once the market hours are formally extended in the coming months.
Indeed, that’s what Citigroup is hoping for, said Nissen.
“As a global firm, we operate on a ‘follow the sun’ model with fully staffed trading and clearing hubs in all three time zones,” he said. “We’ve already started discussing the operational impact of the extended hours with Eurex and I fully expect that we will be connected and ready for business on day one.”
Eurex is aiming for the launch of extended market hours by the end of 2018. Peters said, however, that Eurex is sensitive about providing ample preparation time to all market participants, given the complex regulatory environment at present.
“Firms have a lot of other priorities in regards to Brexit and other things, but our intention is that we would really like to launch it in December,” Peters said. A more formal outline of the launch plan is expected in the coming weeks, he added.
That said, members are not required to participate in the longer hours if they don’t.
“At this stage, trading members need to be reachable during existing trading hours. But it is our intention to change our rulebook so that participants only have to be reachable in case they have quotes or orders in the order book.”
The move reflects an increasingly connected global derivatives market that is influencing how all exchanges structure their businesses.
It also reflects an evolving philosophy at Eurex, which announced in early 2018 that it was cancelling previous efforts to establish a local clearinghouse and exchange hub in Singapore. Instead, the firm’s Asian strategy is now part of a broader effort to offer worldwide accessibility to Eurex markets, Peters said.
“Given the competitive situation, it’s important to offer accessibility during the original Asian trading hours,” he said. “That is what we’ve seen in the market, and there is clear demand.”