Eurex Dividend Derivatives The safe and flexible way to trade dividends Amsterdam May 26, 2011.

Eurex Dividend Derivatives

The safe and flexible way to trade dividends

Amsterdam May 26, 2011

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Eurex Dividend Derivatives May 2011

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Agenda

• Eurex Dividend Index Futures

• Options on EURO STOXX 50® Index Dividend Futures (OEXD)

• Single Stock Dividend Futures

• Applications of dividend derivatives

• Market-Makers

• Further information and contacts

• Appendices

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Launch of Eurostoxx 50 Index Dividend Futures (FEXD)

Jun 2008

May 2010

Launch of options on Eurostoxx 50 Index Dividend Futures (OESX)

Launch of 50 single stock dividend futures (Eurostoxx 50)

Jan/Mar 2010

Launch of 13 UK single stock dividend futures

Feb 2011

Change of SSDF multiplier from 100 to 1000 underlying shares

Oct 2010

Jun 2009

Launch of 4 additional index futures (SMI, DAX, Eurostoxx Select Dividend, DivDAX)

Nov 2010

Launch of 10 Swiss single stock dividend futures

Evolution of the dividend market on Eurex

Eurex dividend derivatives

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Eurex EURO STOXX 50® Index Dividend Futures

Traded Contracts in 2011 3,600,000Traded Contracts Total YTD (as of May 01) 1,232,000Daily Average Traded Contracts (year to date) 15,000Open Interest 644,000 Value of Open Interest €7.8 billion

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Order Book Volume OTC Volume Open Interest

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EURO STOXX 50® Index Dividend Futures (cont.)

• Good balance of product users with agency business initiating over 50 % of trades

• More than 90 exchange members are now trading the Euro STOXX 50® Index Dividend Futures

• Open interest is distributed along the whole curve, with around 80% share in maturities up to 2014

The majority of business is in the agent acc, assumed to be end-customer business

Market Maker27%

Agent51%

Principal22%

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Reference Equity IndexEURO STOXX 50® Index Dividend Futures

EURO STOXX® Select Dividend 30 Index Dividend Futures

SMI® Dividend Futures

DAX® Price Index Dividend Futures

Div Dax® Dividend Futures

Underlying Dividend Points Calculation

EURO STOXX 50® DVPEURO STOXX® Select Dividend 30 DVP

SMI® Dividend Points Index

DAX® Dividend Points Index

Div DAX® Dividend Points Index

Eurex Product ID FEXD FD3D FSMD FDXD FDVD

Contract ValueEUR 100 per index dividend point

EUR 100 per index dividend point

CHF 100 per index dividend point

EUR 100 per index dividend point

EUR 1.000 per index dividend point

Price Quotation in points, with one decimal placein points, with two decimal place

Minimum Price Change0.1 index points, equivalent to a value of EUR 10

0.1 index points, equivalent to a value of EUR 10

0.1 index points, equivalent to a value of CHF 10



Settlement Contract is cash settlement, all values payable on the first exchange day following the Final Settlement Date

Contract MonthsThe ten nearest successive annual contracts of the December cycle

The five nearest successive annual contracts of the December cycle

Transaction FeesRegular Transactions: EUR 1.20 CHF 1.80 EUR 2.00

OTC Block Trades: EUR 1.80 CHF 2.40 EUR 3.00

Contract specifications – Index Dividend Futures

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Liquidity overview- EURO STOXX 50® Index Dividend Futures

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Options on EURO STOXX 50® Index Dividend Futures – Volume & Open interest

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• At the end of April 157.000 contracts had been traded in total, with an ADV of 2.100 contracts

• More than 30 exchange members are now trading the options• On June 1, 2011 a new market making scheme will come into effect to further increase

liquidity

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Underlying EURO STOXX 50® Index Dividend Futures with an underlying of the EURO STOXX 50® DVP (Dividend Points Index)

Contract Value 1 x Dow Jones EURO STOXX 50® Index Dividend Futures at EUR 100 per 1.0 index dividend points of the underlying

Settlement Cash settlement

Price Quotation and Minimum Price Change

The Price Quotation is in points to two decimal places. The Minimum Price Change is 0.01 points.

Contract Months The ten nearest successive annual contracts of the December cycle

Last Trading Day and Final Settlement Day

Last Trading Day is the Final Settlement Day. Final Settlement Day is the third Friday of each December maturity month if this is an exchange day; otherwise the exchange day immediately preceding that day.

Final Settlement Price Based on the final value of the underlying DJ EURO STOXX 50® Index Dividend Futures

Exercise European-style; exercise until the end of the Post-Trading Full Period (20:30 CET).

Exercise Prices At least nine exercise prices shall be available for each expiry for each call and put, such that four exercise prices are in-the-money, one is at-the-money and four are out-of-the-money.

Option Premium/Margining The premium is settled using the options style method – typical of Eurex Options on Indexes.

Contract specifications – Options on EURO STOXX 50® Index Dividend Futures

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Permanent Market Making - Options on EURO STOXX 50® Index Dividend Futures

Minimum Contract Size 100 contracts

Maximum Spread

Bid range (index points) Maximum spread (index points)

Bid up to 3.99 0.804.00 – 19.99 20 per cent Bid > 20

4.00

Required Coverage50 per cent of the total trading period on a monthly average for calls and puts in five out of nine strikes around the current index level. Asymmetric quotation is allowed.

Expiry Range Initial four expirations have to be coveredIncentive 100 per cent free rebate for trades on M-account from

June 1, 2011 until December 31, 2011, for fulfilling monthly obligations and 50 per cent fee rebate for trades on M-account from January 1, 2012 until December 31, 2012.

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Launch of 50 single stock dividend futures (Eurostoxx 50)

Jan/Mar 2010

Launch of 13 UK single stock dividend futures (Barclays, BP, BT Group, Diageo, GlaxoSmithkline, Rio Tinto, Tesco, Vodafone, Anglo American, AstraZenca, BHP Billiton, HSBC, Royal Dutch)

Feb 2011

Change of SSDF multiplier from 100 to 1000 underlying shares

Oct 2010

Nov 2010

Launch of 10* Swiss single stock dividend futures (Nestle, Novartis, UBS, Credit Suisse Group, ABB Ltd., Zurich Financial Services AG, Schweizerische Rückversicherungs-Gesellschaft AG, Swisscom, Compagnie Financiere Richemont and Roch Holding AG)

Evolution of the Single Stock Dividend Futures on Eurex

Eurex dividend derivatives

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* The multiplier has changed from 100 to 1000 underlying shares, effective October 1, 2010

Single Stock Dividend Futures – volume & open interest

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*

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Underlying Annual Dividends of the components of the EuroSTOXX 50® Index

Price Quotation Price Quotation in €, to three decimal places.

Contract Value Contract Value is the Dividends of 1000 underlying shares (1000 x dividends per share)

Contract Years and Reference Period

5 annual contracts are to be available at any time. All contract maturities are based on the EuroSTOXX 50® Index Futures December cycle (third Friday).

Last Trading Day and Final Settlement Day

Last Trading Day / Final settlement day is the third Friday of December of each year. Close of trading in the maturing futures on the last trading day is at 12:00 CET.

Final Settlement Price Contract is cash settled. Calculation of the final settlement price is the final value of the sum of underlying cash/cash equivalent ordinary dividends paid during the annual reference period before tax.

Minimum Price Change 0.001 points, EUR 1

Trading Hours 8:30 – 17:30 CET (12:00 CET on the Last Trading Day)

Contract specifications – Single Stock Dividend Futures

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Contract specifications – Single Stock Dividend Futures (cont.)

• Annual dividend period– For each contract the relevant Annual Dividend Period will be from (but excluding) the preceding

third Friday of December, to (and including) the final settlement date.– Each dividend is determined as paid on ex-dividend date.

• Corporate Actions such as share splits etc. (excluding dividends) do reference the procedures of the equity option/single stock futures at Eurex and will be treated in the same manner in the adjustment of contract sizes and issuing of new contract series where necessary.

– As an exception, Eurex targets “home market” (IDEM) treatment of corporate actions for Italian names.

• Where any such dividend is declared in a currency other than the settlement currency, then such dividend shall be converted at the rate declared by the issuer or, if no such rate is available, at a rate determined by Eurex Clearing AG in accordance with standard market practices.

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Dividend Futures – product description

Dividend Buyer Dividend Seller

Fixed Amount

« Swap Level » or « Future Price »

Floating Amount

« ISDA Qualifying Dividends » = «EUREX Settlement Price »

t

td• Flow : Number of Shares x

• dt : “Qualifying Dividend Amount ”

•

Taxation: Dividend Gross considered (before WHT or Tax Credit)

Dividends Futures = OTC Div Swap * Discount Factor

t

td

Mechanism Mechanism

Dividend Buyer Dividend Seller

Fixed Amount

« Swap Level » or « Future Price »

Floating Amount

« ISDA Qualifying Dividends » = «EUREX Settlement Price »

t

tdFlow : Number of Shares x

dt : “Qualifying Dividend Amount ”

Dividend period : 1 year Dec to Dec (third Friday)

• Taxation: Dividend Gross considered (before WHT or Tax Credit)

► Dividends Futures = OTC Div Swap * Discount Factor

t

td

Mechanism Mechanism

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Dividend Futures – which dividends count

Qualifying dividends

Qualifying

dividends

• 100% of declared dividends, paid either in cash or shares

• Each dividend is determined as paid on ex-dividend date

• Stock dividends are usually included at the equivalent cash amount

• Dividends declared special or extraordinary by the issuer are usually excluded

• Return of capital – follows the related exchange rules

• Share buy-backs usually don’t count

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Dividend derivatives - Why is it easier to trade listed futures than dividend swaps?

Listed Futures

Listed

Futures

• No counterparty risk/No documentation required

• More liquidity and transparency comparing to OTC

• Standardized corporate action methodology, applicable for all equity related products

• Underlying index to monitor accrued dividend

• Possibility to monitor the history of implied dividends across market events

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• Income Protection – allows investors to lock in expected & implied dividends to assure income returns

• Hedging of Dividend Risk, particularly for structured products and equity options

• Directional Views on Dividends – trading of house views on earnings and distributions

• Isolation of Price Return/Capital Growth on Equities

• Dispersion / Correlation – Trading single stock v index dividends

• Curve Trading – terms structures /calendar spreads

• Underlying for Dividend Linked Structures

Dividend DerivativesDividend

Derivatives

Dividend Derivatives – potential uses & applications

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Further information

Factsheets:• www.eurexchange.com > Documents > Publications >

factsheet_single_stock_dividend_futures.pdf

Flyer:• www.eurexchange.com > Documents > Publications > flyer_index_div_fut_en.pdf

Article & Survey:• www.eurexchange.com > Documents > Publications > study_djeurostoxx50_div_fut.pdf

Webinfos:• http://www.eurexchange.com/trading/products/DID_en.html

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Juan Martini

Eurex Zürich AGSelnaustrasse 308021 Zürich Switzerland

P:+41 (0)58 3 99-28 14 F:+41 (0)58 4 99-24 66 [email protected]

Lothar Kloster

Eurex Frankfurt AGNeue Börsenstraße 160487 Frankfurt / MainGermany

P: +49 (0)69 2 11-1 72 89 F: +49 (0)69 2 11-61 72 89 [email protected]

Buy Side Relations Continental Europe

Nicolas Kageneck

Deutsche Börse AGRepresentative Office France17, rue de Surène75008 ParisFrance

P: +33 (0)155 2 76-7 76 F: +33 (0)155 2 76-7 50 [email protected]

Dimitar Dimitrov

Eurex Frankfurt AGNeue Börsenstraße 160487 Frankfurt / MainGermany

P: +49 (0)69 2 11-1 82 33 F: +49 (0)69 2 11-61 82 33 [email protected]

Contact us

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Index dividend product construction

• Dividends included for the futures product are the gross ordinary cash dividends (or cash equivalent) declared and paid by the individual equity components of each index, according to the index providers rules

• Items described or determined as special dividends, extraordinary dividends and return of capital payments etc. where the underlying price index is adjusted by the index provider are excluded from the index dividend calculation.

• In the cases where the index is adjusted for only a part of the gross dividend amount, that portion excluded from the adjustment will be included in the index dividend calculation (as would be the case of the withholding tax element of special dividends with STOXX Ltd)

• The index divided futures contracts will be settled to the calculations of constituent dividends of the relevant index. These dividend amounts will be calculated daily in terms of index point equivalents. The calculation of dividends in index point terms will be, per individual constituent equal to:-

• The final annual settlement value will be the summation of the index point equivalents for the days relevant to that contract period. The dividend value will be calculated and published daily by the index providers on a cumulative basis and the futures contract will cash settle to the determined final annual value

• As noted the calculation is performed on a daily basis so constituents paying multiple dividends in an annual period will have the index points calculated on each ex-dividend date based on the free-float adjusted shares and the official index divisor relevant on those dates

(gross ordinary cash dividend per share in the specified period) x (free-float adjusted shares*)official index divisor**

* Where applicable a cap value as used in the index will also be applied**The official index divisor is the SMI® Index for example is that as calculated and published by SIX Swiss Exchange Limited

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dit . sit . ffit . cfitΣn

i=1


• Dividend Period - Index constituents generally pay all eligible ordinary cash dividends on an annual basis. Thus the most suitable period is an annual contract (on a calendar basis) covering all ordinary gross cash dividends paid in each calendar year. To equate to other Index Futures on Eurex the best matched period for exchange trading is from the 3rd Friday in December to the 3rd Friday in December of the following year. An investor seeking to replicate dividends for say a three year period would do so by entering into a strip of the three annual contracts

• The Index Dividend Amount – will be calculated on each day during the term of the contract period i.e. from but excluding the 3rd Friday in December to and including the 3rd Friday in December of the settlement year. The calculation for ordinary dividends will be based on the following formula:

Index Dividend Amount, DAt =

where:t = day/time on which the amount is calculated (every business day)n = the number of companies in the indexi = individual company being a constituent of the indexdit = the cash dividends (or the declared cash equivalent as announced) (d) in respect of each share of company i which is a constituent of the index paid on that day t or that day (t) being an ex-dividend date as appropriate, or zero if no amount is applicablesit = the number of shares outstanding in company (i) in respect to that day (t)ffit = the free float factor of company (i) in respect of that day (t)cfit = [if any] weighting cap factor of company (i) at day (t)

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• Index Dividend Points – the Index Dividend Amounts calculated on this daily basis as noted above are then converted into index point equivalents in respect of each day, by dividing the daily Dividend Amount by the Index Divisor. Index Dividend Points are calculated on the following formula:

Index Dividend Points DPt =

DAt = the dividend amount on that day (t)Dt = the official index divisor as calculated and published by the index provider at day/time (t)

• The Final Settlement Value of the futures contract is the summation of the calculated Index Dividend Points for each day (t) during the contract period i.e.

Index Dividend Value =

where:T = Contract period (in days)

DAt

Dt*

Σt =1

TDPt


Note: where STOXX Ltd makes an adjustment the Dow Jones Euro STOXX 50® index for part of a dividend value, the unadjusted part of that dividend value is still included in the final settlement. For example if a dividend has a gross value of 4.0 index points and STOXX Ltd makes a net adjustment of 3.2 index points, only the unadjusted amount of 0.8 index points will be incorporated into the final settlement value of the index dividend contract

Note: each annual contract period runs from (but excludes) the third Friday in December of the preceding year to (and includes) the third Friday in December of the expiry year)

* Official Index Divisor

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© Eurex 2011Deutsche Börse AG (DBAG), Clearstream Banking AG (Clearstream), Eurex Frankfurt AG, Eurex Clearing AG (Eurex Clearing) as well as Eurex Bonds GmbH (Eurex Bonds) and Eurex Repo GmbH (Eurex Repo) are corporate entities and are registered under German law. Eurex Zürich AG is a corporate entity and is registered under Swiss law. Clearstream Banking S.A. is a corporate entity and is registered under Luxembourg law. U.S. Exchange Holdings, Inc. and International Securities Exchange Holdings, Inc. (ISE) are corporate entities and are registered under U.S. American law. Eurex Frankfurt AG (Eurex) is the administrating and operating institution of Eurex Deutschland. Eurex Deutschland and Eurex Zürich AG are in the following referred to as the “Eurex Exchanges”. All intellectual property, proprietary and other rights and interests in this publication and the subject matter hereof (other than certain trademarks and service marks listed below) are owned by DBAG and its affiliates and subsidiaries including, without limitation, all patent, registered design, copyright, trademark and service mark rights. While reasonable care has been taken in the preparation of this publication to provide details that are accurate and not misleading at the time of publication DBAG, Clearstream, Eurex, Eurex Clearing, Eurex Bonds, Eurex Repo as well as the Eurex Exchanges and their respective servants and agents (a) do not make any representations or warranties regarding the information contained herein, whether express or implied, including without limitation any implied warranty of merchantability or fitness for a particular purpose or any warranty with respect to the accuracy, correctness, quality, completeness or timeliness of such information, and (b) shall not be responsible or liable for any third party’s use of any information contained herein under any circumstances, including, without limitation, in connection with actual trading or otherwise or for any errors or omissions contained in this publication. This publication is published for information purposes only and shall not constitute investment advice respectively does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. This publication is not intended for solicitation purposes but only for use as general information. All descriptions, examples and calculations contained in this publication are for illustrative purposes only.Eurex and Eurex Clearing offer services directly to members of the Eurex exchanges respectively to clearing members of Eurex Clearing. Those who desire to trade any products available on the Eurex market or who desire to offer and sell any such products to others or who desire to possess a clearing license of Eurex Clearing in order to participate in the clearing process provided by Eurex Clearing, should consider legal and regulatory requirements of those jurisdictions relevant to them, as well as the risks associated with such products, before doing so.Eurex derivatives (other than EURO STOXX 50® Index Futures contracts, EURO STOXX® Select Dividend 30 Index Futures contracts, STOXX® Europe 50 Index Futures contracts, STOXX® Europe 600 Index Futures contracts, STOXX® Europe Large/Mid/Small 200 Index Futures contracts, EURO STOXX® Banks Futures contracts, STOXX® Europe 600 Banks/Industrial Goods & Services/Insurance/Media/Personal & Household Goods/Travel & Leisure/Utilities Futures contracts, Dow Jones Global Titans 50 IndexSM Futures contracts, DAX® Futures contracts, MDAX® Futures contracts, TecDAX® Futures contracts, SMIM® Futures contracts, SLI Swiss Leader Index® Futures contracts, Eurex inflation/commodity/weather/property and interest rate derivatives) are currently not available for offer, sale or trading in the United States or by United States persons.

Eurex Dividend Derivatives The safe and flexible way to trade dividends Amsterdam May 26, 2011.

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Transcript of Eurex Dividend Derivatives The safe and flexible way to trade dividends Amsterdam May 26, 2011.