International derivatives exchange Eurex has announced it will launch four new commodity index futures on March 30, becoming the first European exc
International derivatives exchange Eurex has announced it will launch four new commodity index futures on March 30, becoming the first European exchange to enable trading in commodity index derivatives.
The new futures will be based on the broad Dow Jones-AIG Commodity Index, which comprises 19 different commodities, and the three sub-indices for agriculture, energy and industrial metals.
Peter Reitz, a member of the Eurex executive board, says: “The launch marks another step in our strategy to continuously expand our product offering into new asset classes. The commodity index futures extend our existing suite of gold and emission rights derivatives, bringing new hedging and trading opportunities to our customers.” In recent years, he notes, the last years, more institutional investors such as pension funds have moved into commodities, primarily to diversify their portfolios.
“The Dow Jones-AIG Commodity Indexes are a leading and widely trusted family of commodity indexes measuring the performance of the entire futures-based commodities market, single commodities such as crude oil and sector groupings such as the grain complex,” says Michael A. Petronella, president of Dow Jones Indexes.
“This index family also includes forwards, currency hedged and spot versions and the composite index is calculated in multiple currencies including the euro, yen and sterling. They enjoy widespread recognition, adoption by all the major commodity market participants and a robust methodology that includes the balanced weighting of 19 commodities, avoiding over- or underweighting of a single commodity.”
The four new Eurex futures will be denominated in US dollars and settled in cash using the excess return version of the indexes, and will have quarterly expiration dates. To support order book trading, market makers will ensure on-screen liquidity.
Eurex’s listed contracts will allow smaller levels of notional exposure as the standard contract size will be smaller than that normally traded over the counter. This will allow better allocation across funds, economic access to smaller levels of risk and the ability to gain a more precise level of exposure. Until end of June, trading fees will be waived to support the launch of the new products.
Additionally, the Eurex Clearing OTC wholesale facilities will enable market participants to enter bilaterally agreed futures trades into the central counterparty environment of Eurex Clearing, which mitigates counterparty risks. Most commodity index products currently traded bilaterally are swap transactions and imply a certain counterparty risk.
Depending on demand and market success, Eurex says it may introduce futures based on additional Dow Jones-AIG sub-indices as well as options at a later stage.
The Dow Jones-AIG Commodity Index family was introduced in 1998 and is a well diversified measure for commodities using liquidity and production figures as a weighting scheme and certain caps to limit the influence of individual products or sectors.
