Michael Roczinski outlines the cost benefits to hedge funds using the Eurex platform and highlights recent additions to the product range.
HW: What are the benefits to hedge fund managers and CTAs of using Eurex for their derivatives trading?
MR: For any asset manager, but especially for those active in high turnover strategies, the cost of trading is an important factor. The most explicit cost is measured in terms of market impact. As such hedge fund managers and CTAs are generally looking for highly liquid products that they can enter and exit quickly and efficiently.
In terms of Euro denominated Fixed Income and Equity Index futures and options, Eurex is by far the dominant platform in the market and it is also very strong in individual stock options.
Added to this, the barriers to entry, via either direct membership or through a broker assisted order routing platform, are very low. In addition, in the current environment where returns are below historical averages, the cost of execution is increasingly a factor.
Therefore, the Eurex philosophy of being the low cost provider while maintaining a "one price fits all" for all market participants via a fully electronic platform is attractive to such investors.
HW: What is the percentage of exchange business originating from hedge fund managers and CTAs? Is this a growing trend?
MR: It is difficult for the exchange to put an exact percentage on the amount of business coming from the alternative investment community as the majority of that is seen coming through the agency accounts of our larger brokers and investment banks.
Therefore, rather than speculate on a particular number, which can vary greatly per product, we prefer to highlight the record volumes and open interest that the exchange continues to achieve against a backdrop of increasing amounts of money being allocated to hedge funds generally and more specifically in strategies such as global macro and managed futures which are traditionally heavy users of exchange traded derivatives.
This is further compounded by the increase in the percentage share of business executed via the agency account for a number of our major products. This shows that Eurex with its existing product and service offerings fully recognizes the importance and impact of alternative investment funds that are devoted to our business and anticipate that volumes will continue to grow as further funds are allocated to hedge fund products.
HW: How comprehensive is the Eurex product range?
MR: Eurex provides Fixed Income futures and options covering the entire Euro denominated yield curve from 2 to 30 years. The range was completed with the introduction of the redesigned 30-year futures product, the Euro Buxl, on 9 September 2005, which meets the increasing market demand for long duration derivatives, particularly in light of regular large ultra long issuance from various institutions.
Furthermore, the benchmark European futures and options, based on the EURO STOXX 50 index, were complemented by the introduction of the STOXX 200 and 600 futures contracts on 19. September 2005. While our pan European offerings continue to grow, including the availability of individual stock options on Dutch, French and Italian companies, our more domestic offerings continue to increase their turnover represented by futures and options on the DAX and SMI indexes and individual stock options on German and Swiss companies.
Therefore, we have both regional and pan European products which are both linear and non-linear in their pay off profiles. However, while we have a rather comprehensive product range already, we are about to increase our product offering even further.
HW: What other products are in the pipeline?
MR: We recently announced our intention to launch the first exchange traded Credit Derivative futures based on the iTRAXX Europe CDS index, comprising 125 credit default swaps on European entities, which will further bolster our fixed income product offering.
In addition, our quest for product innovation has been further highlighted by the introduction of volatility futures based on the VSTOXX, VDAX and VSMI indexes on 19 September. Moreover, given the changes that are available under UCITS III, the exchange has followed the demand from traditional fund management groups in particular to introduce futures on individual stocks on 24. October.
We also decided to launch FX futures on the currencies of the Group of Seven industrialized nations on Eurex US on 23 September. We offer competitive pricing relative to the CME (with all trading fees waived for 2005) and the spot FX market, which is where we really believe we have a chance of attracting business as futures are such a small part of the overall FX market currently. In light of this all of the futures contracts will be quoted in spot market convention rather than on a US Dollar base.
In short, while we had a rather comprehensive product range already, we are about to increase our offering even further, including the availability of products in new asset classes such as foreign exchange, volatility and credit derivatives. .
HW: What are the current plans for Eurex US?
MR: We have developed tremendous goodwill from the end customer and trading community in the United States that recognise our role as a catalyst for change and competition which has led to considerable cost savings and increased efficiency in the United States futures and option markets.
We are actively promoting our Russell 1000 and 2000 futures products and our next step is the launch of our FX futures on the currencies of the Group of Seven industrialized nations
HW: Going forward, what can your US and European clients expect from the completion of the Global Clearing Link (GCL)?
MR: The regulatory approval, and therefore implementation, of the GCL has taken a lot longer than the exchange anticipated. In the interim our Eurex members in Europe requested that we extend trading hours on the Eurex platform for European products rather than transfer onto Eurex US. Therefore we have announced plans to extend trading for the Euro-Bund, Euro-Bobl, Euro Buxl and Euro-Schatz, as well as futures on the Dow Jones EURO STOXX indexes and the DAX until 22:00 CET.
The extended trading day will enable Eurex to offer its clients new trading opportunities, cover more of the US trading day and increase distribution in this key market. Customers based in Chicago can then trade Eurex products until 3 p.m. Chicago time, instead of 12 midday for fixed income products and 1 p.m. Chicago time for equity index products currently.
With the extended trading hours, Eurex is meeting customer demand for longer trading hours of Eurex benchmark products into the US trading afternoon. In addition, under the GCL, US based, Eurex members of the Clearing Corporation can already nominate to clear their Eurex business via the Clearing Corporation. This should further enhance the percentage of business that Eurex see coming from the US for the major, benchmark products, which are also CFTC approved.
We are still working with the CFTC to allow the reciprocal availability for European based Eurex US members to clear their Eurex US business via Eurex Clearing AG here in Europe.
HW: What are the cost benefits of using the Eurex platform over those of its rivals?
MR: A major selling point for Eurex has been the lack of membership fee required, in contrast to the high seat prices required by a number of the US exchanges in particular. This has greatly reduced the barriers to entry for a number of market participants.
In addition, as Eurex has never been a member-owned organization, we have never differentiated between end customer and member pricing with respect to exchange fees. As such, end customers benefit greatly from the lowest cost, "one price fits all" mentality that Eurex has always advocated.
HW: In which ways do you market your products to your end customers/ hedge funds?
MR: We attend the relevant industry conferences and contact end customers on a one-on-one basis. Indeed, we have an increasing number of requests from hedge funds to potentially become members of the exchange.
We also work on initiatives jointly with bank and broker intermediaries who are looking to extend their own client reach, which is generally a win/win situation for both parties. The key focus is to try and present material which concentrates on why hedge funds could or should use our product base to generate additional returns for their business.
One of the more successful approaches to developing our business has been to commission academic research from respected academic institutions that have a strong industry presence. Initially we worked with Thomas Schneeweis at the Centre for International and Securities and Derivatives Markets (CISDM) at the University of Massachusetts in Amherst to develop two studies that increased our profile with US-based CTAs and hedge funds.
More recently we have also worked on two studies with one of the top French business schools, Edhec, to further develop our end customer coverage in Europe. These studies have received tremendous feedback from a number of sources and have been very well appreciated as an educational tool.
They can be found on the Eurex website under: http://www.eurexchange.com/investors/institutional/academic/002_en.html 
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