Wednesday, October 20, 2021
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EU bond futures could launch in 2022: stock official

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Futures contracts for European Union bonds could be launched next year by Deutsche Boerse derivatives exchange Eurex, which is currently evaluating the viability of such a move, a senior executive told Reuters.

The EU’s joint debt market was transformed last year when the bloc launched an unprecedented fiscal program to support member state economies during the pandemic. The EU has sold more than 140 billion euros (163 billion dollars) in bonds, with more than 50 billion euros going to its recovery fund and 90 billion euros to its SURE unemployment plan.

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While EU debt trading volumes have recovered significantly, incorporating futures trading would promote market development as it would allow investors to hedge their positions or speculate on future price movements.

Lee Bartholomew, director of research and development for fixed income derivatives at Eurex, said discussions on futures began after the EU presented a roadmap for its financing plans over the summer.

The primary traders, who manage the trading of the securities, were contacted by investors interested in seeing the development of the secondary market, he said.

“I think the conversations are largely positive,” Bartholomew said in an interview.

“What is positive is (among) the end users, based on the commitment that we have had, there is the opinion that it will be additive to the portfolio of products that we have.”

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Futures are derivatives through which investors can agree to buy or sell a basket of underlying securities at a future date. Major government bonds, including Treasuries and German bonds, have lively futures markets.

Eurex offers futures on German, Italian, French and Spanish government bonds. Together with CME Group’s BrokerTec, it also facilitates the trading of repos on EU bonds, allowing investors to borrow and lend the securities.

Bartholomew said that if the discussions move forward and the conclusions align with the European Commission’s thinking, a futures contract could be launched in 2022, when the EU is expected to have issued enough bonds for a more developed secondary market.

He said Eurex was collecting feedback from interested parties, including primary distributors, on topics to help assess the viability of a derivatives contract.

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Those include how secondary market liquidity evolves, how different EU futures would be from futures that Eurex already operates for other governments, and what the temporary nature of EU loans would mean for potential futures, he said.

Currently, debt recovery funds are expected to end in 2026, a potential hurdle for the market even as the scale of issuance increases.

A European Commission budget official said in September that while futures were “part of the mix” to improve liquidity, there were no immediate plans to launch a contract. ($ 1 = 0.8612 euros) (Information by Yoruk Bahceli; Edited by Sujata Rao and Steve Orlofsky)

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