Eurex upgrade timeline too tough, say banks

European clearing firms are calling on Eurex to delay a major upgrade to its derivatives platform—a move that will allow the bourse to launch futures with more expiries—citing a lack of time to prepare and implement the technical changes requested by the exchange.

Eurex’s so-called Next Generation derivatives initiative will see it introduce sub-monthly contracts, which would allow for multiple expiries on the same underlying several times a month, as opposed to a single expiry, usually at the end of the month. This would be a big change from the current approach of having multiple separate contracts referencing a single underlying, each expiring on different dates.

In addition to simplifying back-end processes, it will allow for easier position rolling for options contracts and more convenient basis trading. Equity futures including the bourse’s vast MSCI complex will be upgraded, although fixed income futures such as Eurex’s Bund, Bobl, and Schatz complex will not be subject to the change.

However, the new products require members, vendors, and trading firms to make adjustments to their back-end systems to remain in sync with the exchange. Although the changes have been in train for some 18 months, with the bourse acceding to member demands for a year-long delay from a planned roll-out in November 2021, there are other pending major architectural changes at Eurex’s largest rivals, Ice Futures Europe and CME Group, and some fear the industry is running out of bandwidth.

“The current timeline from Eurex is aggressive, and I do not believe the whole market can absorb it in six months,” says an executive at a large European clearing firm.

An executive at a large European Union clearing bank agrees, adding: “The transition is going to cause a lot of pain for the industry. The industry is less than prepared … but they [Eurex] seem very intent with barrelling through without a great deal of consideration for their FCM [futures commission merchant] partners.”

The transition is going to cause a lot of pain for the industry. The industry is less than prepared

Executive at a large EU clearing bank

The new contracts require clients and vendors to adjust their reporting, graphical interfaces and the way in which their trading systems identify contracts. For instance, the most basic change will involve changing the way in which contracts are reported from just the month and year (represented by MMYYYY) to year, month and day (YYYYMMDD).

In consultation with market participants last summer, Eurex extended its planned implementation phase from November 2021 to November 2022. The exchange continues to discuss issues related to the roll-out with industry body the FIA.

Jonas Ullmann, chief operating officer of Eurex Frankfurt, says the exchange understands the concerns, adding that Eurex is ready to help members overcome them. The bourse has offered its longest ever simulation period—more than five months—to allow lead time for vendors and market participants to prepare, he adds.

“Eurex is aware of the significant impact and challenges for certain market participants, and has therefore, since the start of this initiative [Q3 2020], been in regular and close exchange with its clearing members, trading participants and software vendors to ensure a smooth and aligned market introduction,” Ullmann says.

Eurex says the changes will allow it to introduce functionality, such as new expiries, in tune with member demand. In options trading, for instance, position rolling will become easier, as firms will be able to roll positions with a single transaction with a call or put calendar spread, as opposed to selling and buying a new contract.

MSCI futures will support easier basis trading between quarterly and daily futures, Eurex says. Basis trade settlement is only possible on the current day of trading, but the changes will mean being able to trade a strategy that expires within two business days.

But the changes come at a bad time, the executive at a large US clearing bank suggests.

A number of exchanges are pushing through major changes that all require changes to back-end systems. Ice and CME are both pushing overhauls of their static margin frameworks, changing to a constantly updating value-at-risk model.

Both CME and Ice’s initiatives suffered major delays due to the Covid-19 pandemic. In December 2021, CME told members it would be pushing back implementation from the first quarter of 2022 to later in the year. Ice is intent on implementing its changes early this year.

On the front-office side, dealers have been moving away from Libor to risk-free rates, sucking away attention from potential new products that Eurex is planning.

“You have to look at it from their [Eurex’s] perspective,” says the senior FCM source.

“Why is it fair for Ice or CME to push their initiatives and Eurex has to delay to 2023? They’re all competing … They want to go live and show improvements, and come up with new products as soon as possible. But in terms of scheduling, it is becoming very difficult to accommodate everything.”