Do you know that the global derivatives market is mammoth-sized? According to recent research by Business Research Insights, the market size of the derivatives market is expected to reach $54,484.49 million by 2031.
Derivatives are financial contracts whose values vary based on underlying assets. Futures, forwards and options are popular examples of derivatives.
Derivative exchanges play a prominent role in derivative transactions as they provide a platform for trades. Today’s article deals with one such exchange – Eurex, one of the largest derivative exchanges across the globe.
What is Eurex?
Eurex is an exchange platform that primarily handles derivative-related transactions. It is the largest exchange in the European region. Founded in 1998, Eurex is headquartered in Eschborn. The exchange deals with stocks, bonds, indexes and other derivatives. Though it mainly focuses on European instruments, it provides trading opportunities for traders globally.
- History
It all began in the 1990s, amidst the “Battle of Bund” when the Frankfurt Exchange began dominating the London Exchange in the bond market. This was the time when electronic trading systems were less popular, as compared to the open outcry system of shouting and hand-signalling on the trading floor.
Deutsche Terminbörse, the Frankfurt Exchange, was one of the first to offer electronic trading systems, overtaking all its competitors. It then merged with the Swiss Derivatives Exchange and jointly created the Eurex Exchange in 1998.
Also read: What are equity derivatives?
- Connection with Deutsche Börse AG
When Eurex was created, it was jointly held by Deutsche Börse and SIX Swiss Exchange. In 2012, Deutsche Börse bought the holdings of Swiss Exchange and became the sole holder of the Eurex Group.
So, Deutsche Börse is the parent company with subsidiaries like Eurex, Clearstream, Frankfurt Stock Exchange and other trading-related entities.
Features and functions
- Eurex is popularly known for trading in derivatives. But it deals with bonds, indexes and other instruments.
- Eurex Exchange trading hours – 07.30 to 22.00 CET (11.30 AM to 2 AM IST)
- Eurex uses electronic systems for trading. It uses a technology called T7 developed by the Deutsche Börse Group to facilitate online trading platforms.
Also read: https://www.stockgro.club/blogs/trending/nse-trading-hours/
Functions of Eurex Exchange:
- It provides an electronic platform to trade across a range of products as follows: Interest rate derivatives, equities, equity index derivatives, dividend derivatives, volatility derivatives, exchange-traded funds and exchange-traded commodities, cryptocurrencies, commodity derivatives, FX derivatives and repo instruments.
- Eurex acts as a market maker. It places orders on its own behalf to influence the prices of instruments and bridge the gap between bid and ask orders.
- Eurex plays a significant role in providing liquidity in financial markets. Liquidity provision is the process of exchanges ensuring sufficient availability of instruments in the market. Most instruments take their prices based on the demand and supply conditions in the market. Liquidity provision helps to keep the demand and supply stable to ensure price fluctuations are not erratic.
- Eurex Exchange has a clearing wing – Eurex Clearing, that helps in clearing and settlement of trades.
- Eurex Exchange publishes real-time data and statistics covering different markets that help traders and investors with research to make informed investment decisions.
Subsidiaries of Eurex Group
Apart from Eurex Exchange, the Eurex Group has other entities under its control:
- European Energy Exchange (EEX)
Founded in 2002 and headquartered in Germany, EEX is an exchange that particularly deals in commodity trades.
The exchange trades commodities like electricity, natural gas and other energy-related products. The trading volumes of some of their products in 2020 were as below:
Electricity: 6,456 terawatt hours
Natural gas: 2,412 terawatt hours
Emission allowances: 1,318 million tonnes
The exchange allows on-spot trading and derivative trading, too. The settlement of transactions on EEX happens through European Commodity Clearing AG (ECC), a subsidiary of EEX.
In 2014, the exchange launched its transparency site to provide traders with relevant information in the energy sector to facilitate trading decisions.
- Eurex Clearing
Eurex Clearing is the clearing house of Eurex Exchange.
A clearing house facilitates trades by ensuring that both parties in trade fulfil their obligations and settle trades promptly.
Eurex Clearing is one of the superior clearinghouses in the world. It is the first clearing house to provide real-time data on risks associated with derivative trading, which allows traders to prepare well for risks in trading.
Eurex clearing has tie-ups with 200 clearing members in 19 countries, with collaterals worth EUR 49 million. The value of trades cleared through Eurex Clearing is approximately EUR 11 trillion per month.
- Eurex Repo GmbH
Eurex Repo GmbH is Eurex’s wing that deals with trades around repo instruments.
Repo agreements, also called repurchase agreements, are short-term contracts to buy and sell government securities like treasury bills and commercial papers. Eurex Repo facilitates trading, clearing and settlement of repo agreements.
Founded in 2001, Eurex Repo has over 10,500 fixed-income securities classified into 33 different categories. The market offers various securities like European Government Bonds, European Covered Bonds, European Corporate Bonds, Agency Bonds, etc.
Also read: Government bonds in India – Meaning, types and features
- Eurex Bonds
Eurex Bonds is an Electronic Communication Network (ECN) that facilitates online trading in fixed-income securities.
ECN is a digital system where buy and sell orders directly match with each other based on the terms of trade. Eurex Bonds associates with Eurex Exchange and Xetra to offer derivatives and other products for trade. It also works with Eurex Clearing for settlements.
Eurex Bonds offers two categories of products: Cash bond products and basis products.
Cash bond products include German government bonds, German treasury discount papers called bubills, jumbo mortgage bonds, German state bonds, etc.
Basis products refer to instruments that combine bonds and futures contracts.
Bottomline
Eurex Exchange, also called Eurex Frankfurt AG, is one of the leading derivatives exchanges globally. Owned by Deutsche Börse, the exchange fulfils more than 1.8 billion contracts in a year. Having various wings that cover different kinds of products and markets, Eurex provides multiple services to its customers under one roof.
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