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Futurization is dead. Long live futurization.

Release date: 19 Jun 2018 | Eurex Exchange

Futurization is dead. Long live futurization.

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


At the recently held IDX conference some of the world’s exchange leaders declared the era of futurization over, some even talked about the death of futurization. It was Mark Twain who found the report of his death greatly exaggerated. What if the same goes for futurization? What if we could breathe new life into it and shift from stability to efficiency? Would that not be an interesting turning point? It indicates that we all focus on growth opportunities again and contribute to the economic growth the world needs.

Definition Futurization

Prior to the Dodd-Frank Act, the OTC swaps marketplace lacked regulatory oversight, transparency and clearing, and the vast majority of derivative trades were executed in this marketplace. After the Dodd-Frank Act, all OTC swaps trades are subject to regulatory oversight, and the vast majority must be traded transparently and cleared.
Futurization is the migration of traditional dealer based bi-lateral contracts into similar standardized "futures-style" contracts which are centrally cleared and exchange-traded.

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Eurex has long stood for financial stability. That means, I am not talking about a free-for-all, no-holds-barred return to risk trading. On the contrary, I am talking about innovative solutions and new answers to create both stability and efficiency. In my opinion, a shift towards standardization and transparency could definitely be of help.

True, we tried that before and true again, some swaps futures launches have not been very successful. However, they probably failed because they did not solve a client problem or were addressing a problem the client did not have at all.

The success of our new dividend futures and especially our new total return futures proved the point. We were the first exchange to offer a futurized version of Total Return Swaps that we call Total Return Futures (TRF). We have already migrated up to 30 % of the OTC swap market in EUROSTOXX 50 derivatives in just one year. We will build on this success and launch new Total Return Futures by the end of the year.

However, it is crucial that we get it right. We have to stand for financial stability and at the same time deliver innovative and efficient solutions. Whenever we create new products, the first question we have to answer ourselves is: What is the additional value of this innovation? That is why market consultation and close cooperation with our customers is so important for our business. For example on the Total Return Futures, BNP Paribas worked closely with Eurex to deliver a product where they also become a key user, distributor and liquidity provider.

In general, futurization of an OTC market segment always has a functional, structural and distributional element. Most importantly, you have to get the timing right for all stakeholders. You can be either too early, just in time or too late for change. I will explain that further in a second part of this article.

Eurex has a history with futurization

In 2013 Eurex was already setting the stage for futurization. Actually, we were the first mover in futurization by successfully transforming the OTC dividend swap market into an almost completely exchange-traded listed market.
New, exchange-traded variants of swap contracts mimiced swaps. To appease users of swaps, these new futures contracts were an attempt to keep some of the customizable features of swaps while maintaining some of the advantages of a centralized exchange.

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