Eurex Fixed Income ETF Options - Eurex Exchange · Eurex Fixed Income ETF Options January 2020...

Eurex Fixed Income ETF Options

January 2020

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Eurex Fixed Income ETF Options January 2020

Agenda

• Introduction

• Contract Specifications:

EUR-listed Fixed Income ETF Options Volumes

USD-listed Fixed Income ETF Options Volumes

• Opportunities with FI ETF Options

• Wholesale Offering

• Contacts

• Appendix

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Introduction

• The European market for fixed income ETFs plays a key role in the financial ecosystem. It has grown consistently after the financial

crisis, both in terms of market participants, as well as overall assets under management.

• There is strong buy side support from hedge funds and real money investors for European listed Fixed Income ETF options. The

basis risk around CDS index options is seen as problematic. US listed Fixed Income ETF options are inaccessible from Europe and

the benefits of trading ETFs relative to single ISINs and CDS are increasingly recognised (liquidity, access to underlying, execution,

matching of relevant benchmark).

• Fixed income ETF options listed in the US have seen significant volume from both institutional and retail investors (approx. 60-40

split).

Market Demand

• There is continual growing institutional demand for bond ETFs in Europe.

• Greenwich Associated LLC’s (2019) study revealed that 78% of institutional investors identify ETFs as their preferred vehiclefor index strategies.

• Investors that have already embraced portfolio trades are now utilizing ETFs in lieu of options, swaps, and futures. Instead of entering total return swaps, they are finding similar exposure in an ETF.

• Rather than using credit default swaps, investors are hedging their debt holdings with help from options on ETFs.

On December 9th 2019, Eurex was the first exchange to launch Euro Fixed Income ETF Options.

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iShares ETF Underlyings for Options at Eurex

Overview: iShares ETF underlyings for options listing on Eurex

No. ISIN Bloomberg Name Underlying Index Currency

1 IE00B3F81R35 IEAC LNiShares Core EUR Corporate

Bond ETF

Bloomberg Barclays Euro Corporate Bond Index EUR

2 IE00B66F4759 IHYG LNiShares EUR High Yield

Corporate Bond ETFMarkit iBoxx Euro Liquid High Yield Index EUR

3 IE00B4PY7Y77 IHYU LN

iShares USD High Yield

Corporate Bond ETF (*European

and American exercises)

Markit iBoxx USD Liquid High Yield Capped

IndexUSD

4 IE00B2NPKV68 IEMB LNiShares J.P. Morgan USD

Emerging Market Bond ETFJP Morgan EMBI Global Core Index USD

5 IE0032895942 LQDE LNiShares USD Corporate Bond

ETF

Markit iBoxx USD Liquid Investment Grade

IndexUSD

6 IE00BSKRJZ44 IDTL LNiShares USD Treasury Bond

20+yr UCITS ETFICE U.S. Treasury 20+ Year Bond Index USD

• The underlyings have been chosen as they are where Eurex anticipates the highest client demand based on our conversations with

liquidity providers, end-clients and BlackRock.

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Eurex EUR Fixed Income ETF Options–Contract Specifications

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Attribute Details

UnderlyingiShares Core EUR Corporate Bond ETF

iShares EUR High Yield Corporate Bond ETF

Currency EUR

Contract months The next three consecutive calendar months are available, and the next three succeeding quarterly

expiration days (March, June, September, December) thereafter.

Last Trading day

(option expiration day)3rd Friday of expiration month

Final settlement Day Physical Delivery. Settlement in t+2 business days after the last trading day

Exercise (Prices) European-style, with exercise price intervals of 0.5 index points

Daily Settlement Price Determined by Eurex based on the Cox/Ross/Rubinstein model*

Contract Size 100 Index Fund Units

Minimum Tick 0.01

Trading HoursOrder book: 9:00 - 17:30 CET

Off-Book: 9:00 - 19:00 CET (EurexT7 Trade Entry Services)

Block Trading Allowed. Block Trade Minimum Size: 100 lots

Fees Order book: EUR 0.30 Off-Book: EUR 0.40

*In the absence of screen prices, product development have built a pricing model to calculate end of day settlement prices ba sed on the implied volatility of the US-listed options.

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Asset Growth and Daily Volume of European Fixed Income ETFs

• IHYU LN – iSharesUSD High Yield Corporate Bond ETF which tracks the Markit iBoxx USD Liquid High Yield Capped Index.

• IEMB LN – iShares J.P. Morgan USD Emerging Market Bond ETF which tracks the JPM EMBI Global Core Index.

• LQDE LN – iShares USD Corporate Bond ETF which tracks the Markit iBoxx USD Liquid Investment Grade Index.

ETF

Underlyings

• The fixed income ETFs detailed above were selected with major

stakeholders as the most promising underlyings of fixed income

ETF options at Eurex.

• Daily volumes continue to increase, vis-à-vis the

continued positive development of assets under

management.

6

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2011 2012 2013 2014 2015 2016 2017 2018

Average Assets Under Management in mn

IHYU LN Equity IEMB LN Equity LQDE LN Equity

Average Assets Under Management in

mn 2011-2018

IHYU LN Equity IEMB LN Equity LQDE LN Equity

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Eurex USD Fixed Income ETF Options–Contract Specifications

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Attribute American-Style Exercise European-Style Exercise

UnderlyingiShares USD High Yield Corporate Bond ETFiShares J.P. Morgan USD Emerging Market Bond ETFiShares USD Corporate Bond ETF

iShares USD High Yield Corporate Bond ETFiShares J.P. Morgan USD Emerging Market Bond ETFiShares USD Corporate Bond ETFiShares USD Treasury Bond 20+yr UCITS ETF

Currency USD USD

Contract

months

The next 13 consecutive months, plus January and December expirations for the following two years. When the August contract expires, a January expiration for a fourth year becomes available. When the September contract expires, a December expiration for a fourth year becomes available.

Expiries for the next six consecutive monthly expiries, and the next two quarterly expiries.

Last Trading

day (option

expiration day)

3rd Friday of expiration month 3rd Friday of expiration month

Final

settlement Day

Physical Delivery. Settlement in t+2 business days after the last

trading day.

Physical Delivery. Settlement in t+2 business days after the last

trading day.

Exercise

(Prices)

American-style, with exercise price intervals of 0.5 index points for

the first three monthly contracts, and 1.0 index points for the back

months, with at least 7 exercise prices available for each term for

each call and put.

European style, with exercise price intervals of 0.5 index points for the first three monthly contracts, and with at least 7 exercise prices available for each term for each call and put.

Daily

Settlement

Price

Determined by Eurex based on the Cox/Ross/Rubinstein model* Determined by Eurex based on the Cox/Ross/Rubinstein model*

Contract Size 100 Index Fund Units 100 Index Fund Units / 2000 Index Fund Units (for ODTL)

Minimum Tick 0.01 0.01

Trading HoursOrder book: 9:00 - 17:30 CET


Order book: 9:00 - 17:30 CET


Block Trading Allowed. Block Trade Minimum Size: 100 lots Allowed

Fees Order book: USD 0.30 Off-Book: USD 0.40 Order book: USD 0.30 Off-Book: USD 0.40

*In the absence of screen prices, product development have built a pricing model to calculate end of day settlement prices ba sed on the implied volatility of the US-listed

options.

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Opportunities in Trading Eurex Fixed Income ETF Options

Volatility Trading

Offer the possibility to trade volatility on fixed income ETFs.

Optimized Portfolio

Management

Enables flexible management of interest rate beta as a portfolio overlay.

Managing Exposure

• Downside protection

• Income generation

• Leverage beta – selling on the money call

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European Access

Opens access to Fixed Income ETF Options for investors looking for UCITS

compliant products.

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USD FI ETF Options - Volumes since launch

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Traded Contracts since launch

OEMB: 310

OHYU: 189,115

OQDE: 220

Largest Trade = $810mn

Credit Only Current Assets Q3 2018 – Q3 2019

24%

36%

40%

High Yield Corporate European ETF

Current Assets

IHYU IHYG OTHER HY

15%

8%

77%

Investment Grade European ETF Current

Assets

IEAC LQDE OTHER IG

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Wholesale Offering

The Eurex Fixed Income ETF Options can also be traded outside the order book on a bilateral basis, and subsequently booked to Eurex Clearing through the use of our Eurex T7 entry service.

Block Trading

Members are able to enter bilaterally agreed off-book transactions into the trading and clearing system. Registered off-book trades are then automatically cleared like

regular exchange transactions. The Block Trade Entry facility is fully electronic and

integrated into members’ processes (the exchange defines a minimum number of contracts for a Block Trade – see below).

Minimum Entry Size for

Block Trades

100 Contracts.

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Flexible Options

Market participants can design flexible options by selecting:

• Exercise Price.

• Expiration Date.

• Exercise Style (American or European).

• Settlement Type (Cash Settled or Physically Delivered).

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Further InformationProduct

Information

Vendor Codes

• For further info on Eurex fixed income products >

http://www.eurexchange.com/exchange-en/products/int/fix/government-bonds/

Eurex Product

Eurex Product Code Underlying Name Bloomberg Code

OHYU IHYU LNOptions on iShares USD High Yield

Corporate Bond ETF

IHYU LN OMON

<Equity>

EHYU IHYU LNOptions on iShares USD High Yield

Corporate Bond ETF(European Exercise)

OEMB IEMB LNOptions on iShares J.P. Morgan USD

Emerging Market Bond ETF

IEMB LN OMON

<Equity>

EEMB IEMB LNOptions on iShares J.P. Morgan USD

Emerging Market Bond ETF (European Exercise)

OQDE LQDE LNOptions on iShares USD Corporate

Bond ETF

LQDE LN OMON

<Equity>

ELQD LQDE LNOptions on iShares USD Corporate

Bond ETF (European Exercise)

OHYG IHYG LNiShares EUR High Yield Corporate

Bond ETFIHYG LN OMON

<Equity>

OEAC IEAC LN iShares Core EUR Corporate Bond ETFIEAC LN OMON

<Equity>

ODTL IDTL LNiShares USD Treasury Bond 20+yr

UCITS ETF

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Market MakersContact Details

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Dan Carr

T +4420 7888 3473

[email protected]

Brian Curran

T +4420 7888 4807

[email protected]

Credit Suisse – EUR, USD (only Block Trades)

•Goldman Sachs – EUR, USD (only Block Trades)

Gabriel Manceau

T +4420 7425 4163

[email protected]

iShares J.P. Morgan USD Emerging Market Bond UCITS OptionsiShares USD High Yield Corporate Bond UCITS Options

iShares USD Corporate Bond UCITS Options

iShares Core EUR Corporate Bond ETFiShares EUR High Yield Corporate Bond ETF

Morgan Stanley – USD (only Block Trades)

Declan Curry

T +4420 7051 8741

[email protected]

iShares J.P Morgan USD Emerging Market Bond UCITS OptionsiShares USD High Yield Corporate Bond UCITS Options



J.P. Morgan – EUR (only Block Trades)

Alex Richards

T +4420 7134 1191

[email protected]


iShares J.P. Morgan USD Emerging Market Bond UCITS OptionsiShares USD High Yield Corporate Bond UCITS Options



mailto:[email protected]





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Eurex Contacts

Rex Jones

Eurex Frankfurt AGMergenthalerallee 6165760 EschbornGermany

P: +49 (0)69 2 11-1 78 [email protected]

Derivatives Product Development

•Sales Switzerland, Italy, Malta and Lichtenstein

Samuel Price

Deutsche Börse AGUK Representative Office11 Westferry Circus, Canary WharfLondon, E14 4HEUnited Kingdom

P: +44 (0) 20 78 62-73 47 [email protected]

Vassily Pascalis

Deutsche Börse AGUK Representative Office11 Westferry Circus, Canary WharfLondon, E14 4HEUnited Kingdom

P: +44 (0)20 78 62-72 [email protected]

•Sales Americas

•Sales United Kingdom

Tim Gits

Eurex Frankfurt AGChicago Representative Office233 South Wacker Drive - Suite 2450Chicago, IL 60606USA

P: +1 312 5 44-10 58 [email protected]

Francesca Dell’Era

Eurex Global Derivatives AGBaarerstrasse 1356300 ZugSwitzerland

P: + 41 (0)43 430 71 23 [email protected]

Sales Asia

Derivatives Product Development

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Markus Georgi

Eurex Frankfurt AG Eurex Representative Office Hong Kong2904 - 7, 29/F, Man Yee Building, 68 Des Voeux Road Central, Central Hong Kong

P: +852-25 30-78 [email protected]

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Outrights

Bid Up ToMaximum

SpreadUnit

Minimum Quote Size(Contracts)

Quotation Time Required Coverage

1.5 0.6 Tick 10 09:00 – 17:30 CE(S)T** 80%

15 40% Percent 10 09:00 – 17:30 CE(S)T** 80%

6 Tick 10 09:00 – 17:30 CE(S)T** 80%

*USD underlyings: 15:30 – 17:30 CET

1) Upon fulfilment of the Building Block requirements of one product, Liquidity Providers shall receive a fee rebate in accordance with the table below. The evaluation takes place on a monthly basis.

2) Up to 25% Revenue Sharing limited to the Top 3 LPs to be allocated by their trading volume on M-accounts, to run from 1st January 2020 until 31st

December 2021:

• LPs will need to fulfil the Basic Block requirements of the product on a monthly basis to participate in the revenue sharing scheme.

• Revenue sharing will be based on the trading volume on M-accounts of the qualified LPs within the group of all qualified LPs, but limited to

the Top 3 LPs.

• Order book and TES transactions are considered for the market share calculation.

• Distribution depending on the number of qualifying Liquidity Providers are as follows:

• 1 x LP only = 25% of total revenue

• 2 x LPs = 15% / 10% split of total revenue

• 3 x LPs = 12.5% / 7.5% / 5% split of total revenue

Incentives and Quote Requirements

Proposed Liquidity Provider Scheme

Quote Requirements:

2 Incentive Components:

Orderbook TES

Basis 60% 50%

Package* 30% 30%

*All ihares ETFs

Package ID: ISHA

Criteria: Fulfilment of Basis Block requirements

in 23 products

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iShares USD High Yield Corporate Bond ETF - IHYU LN

Underlying - Markit iBoxx USD Liquid High Yield Capped Index

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iShares iBoxx $ High Yield Corporate Bond ETF (HYG) seeks to track the investment results of an index composed of U.S. dollar denominated high yield corporate one of the most widely used high yield bond ETFs. It gives the holder a broad exposure to U.S. high yield corporate bonds and is used by investors and money managers to seek higher income. It has 1,036 holdings and is in the lowest risk profile bucket.

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iShares J.P. Morgan USD Emerging Market Bond ETF - IEMB LN

Underlying - JP Morgan EMBI Global Core Index

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iShares J.P. Morgan USD Emerging

Markets Bond ETF (EMB) seeks to track the investment results of an

index composed of U.S. dollar-denominated, emerging market

bonds. It gives the investor access to the sovereign debt of 30+

emerging market countries in a single fund. It is used by investors to

seek higher yield and customize their emerging market exposure. It

has 382 holdings and is in the second lowest risk profile bucket.

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iShares USD Corporate Bond ETF – LQDE LN

Underlying: Markit iBoxx USD Liquid Investment Grade Index

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Corporate Bond UCITS ETF (LQDE) seeks to track the performance of an index composed of US Dollar denominated investment grade corporate bonds. It gives diversified exposure to corporate bonds issued in US Dollar. It gives the investor ability to directly invest in corporate bonds across sectors (industrials, utilities and financial companies). It has 1,803 holdings and is in the middle bucket on the 1-7 scale on the risk-reward profile.

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iShares EUR High Yield Corporate Bond ETF – IEAC LN

Underlying: Bloomberg Barclays Euro Corporate Bond Index

The Bloomberg

Barclays Euro-

Aggregate: Corporates

Index is a benchmark

that measures the

corporate component of

the Euro Aggregate

Index. It includes

investment grade, euro-

denominated, fixed-rate

securities. (Future

Ticker: I02002EU)

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iShares EUR High Yield Corporate Bond ETF – IHYG LN

Underlying: Markit iBoxx Euro Liquid High Yield Index

The Markit iBoxx EUR

High Yield Indices are designed to reflect the

performance of EUR denominated sub-

investment grade corporate debt. The

index rules aim to offer a broad coverage of the

EUR bond universe, whilst upholding

minimum standards of investability and liquidity.

The indices are an integral part of the global

iBoxx index families, which provide the

marketplace with accurate and objective

benchmarks by which to assess the performance

of bond markets and investments.

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Necessary preparations for the start of trading for USD ETF Options

• All Eurex Trading Participants (GCM, DCM or NCM) who wish to participate in trading in options on

iShares USD High Yield Corporate Bond ETF, iShares J.P. Morgan USD Emerging Market Bond ETF

and iShares USD Corporate Bond ETF at the Eurex Exchanges and General Clearing Members

whose Non-Clearing Members wish to participate in trading at the Eurex Exchanges, must complete

the CSD-Selection form (attachment 4 to Eurex circular 120/17) for settlement account settings for

derivative deliveries. This activates the CBF 6-series (CBL) account for EXTF options denominated in

USD necessary to trade options on iShares USD High Yield Corporate Bond ETF, iShares J.P.

Morgan USD Emerging Market Bond ETF and iShares USD Corporate Bond ETF.

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Eurex Fixed Income ETF Options - Eurex Exchange · Eurex Fixed Income ETF Options January 2020...

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