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6. Interest Rate Products at Eurex

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Prior to the start of European Monetary Union (1999), German government bonds were the de facto benchmark for the European government bond market due to their liquidity and

Prior to the start of European Monetary Union (1999), German government bonds were the de facto benchmark for the European government bond market due to their liquidity and credit rating as well as the stable monetary policy, the size of the cash market and the existence of well developed repo and derivative markets in Germany.

The introduction of the euro, creating one single currency for the Eurozone countries, extended Germany’s leading position in debt issuance due to the elimination of any currency risk. Companies that had previously invested in assets that matched their liabilities in both duration and currency terms could now invest in a broader range of fixed income debt than previously.

As Germany had the most favorable credit rating of Eurozone issuers, German euro debt was considered a safe haven. However, the integration of securities markets across the Eurozone had begun prior to the introduction of the euro, with significant decreases in yield spreads between the debt issuance of other members of the European Monetary Union and the benchmark German debt. This reduction in interest rate differentials resulted in a reduction in basis risk and led to further consolidation of the segment.

(European) Yield Spread Differential to Ten Year German Government Bonds

This caused market participants to turn to Eurex euro-denominated fixed income derivatives to hedge their domestic debt issuance. This has further strengthened the importance of German debt on all major points of the euro yield curve.

Eurex Euro Fixed Income Futures & Options

In terms of euro-denominated fixed income derivatives, Eurex offers the Euro Bund (8.5 – 10.5 y), Euro Bobl (4.5 – 5.5 y) and Euro Schatz (1.75 – 2.25 y) Futures and Options on Futures as well as the Euro Buxl Future (30 y). Eurex’s fixed income futures are the world’s most heavily traded bond futures. In 2003, the flagship contract of long-term European
interest rates, the Euro Bund Future, has reached a daily average volume of nearly one million contracts.

The table below highlights the liquidity of these futures contracts (Footnote 1) in terms of average trade size, bid/offer size and market depth.

Liquidity in Eurex Euro Fixed Income Futures

Data as of Jan 2004

Eurex fixed income options have enjoyed growing popularity over the last two years, with daily average volumes rising sharply. The importance of strategy trading in Eurex fixed income options combined with the general dispersion of liquidity in options trading are two of the most decisive factors that have shaped the market structure in these products.

Eurex Bonds & Eurex Repo

Eurex fixed income futures are considered the benchmark for the European yield curve and often serve as a standard reference when comparing and evaluating interest rates in Europe to manage interest rate risk. A natural extension to this success was to create the cash bond platform Eurex Bonds, to accommodate trading in the underlying cash bonds in combination with the futures products. Eurex Bonds was conceived as an electronic communication network (ECN) and provides participants with an electronic platform for off-exchange, “wholesale” trading in fixed income bonds. However, by implementing the Eurex Bonds trading platform a direct link between the spot and futures markets is available for the first time to enable electronic basis trading of bonds via a central quote book. Liquidity in the bond
and basis trading markets is provided by Market Makers. In total 26 trading members including the Deutsche Bundesbank are connected to Eurex Bonds. Moreover, the German Finance Agency performs its market management and regulating operations via the Eurex Bonds platform.

In addition, given that the repo (repurchase agreement) market is the collateralized lending facility that ensures the smooth operation of cash and futures market activities, the ability to trade repos electronically was also created with the introduction of Eurex Repo. Trading in the repo market has expanded strongly in recent years, given its importance in ‚oiling the wheels’ of the cash and futures markets. By the end of 2003, 28 participants including the German Finance Agency were actively trading in the Euro Market on Eurex Repo. The share of electronically traded repos is steadily increasing within this context, in a pursuit of price transparency, standardization and simplified settlement.

Inter Relationships

These facets of trading, hedging and arbitraging fixed income exposure on the Eurex platforms are all then efficiently cleared via one central counterparty – Eurex Clearing AG. The ability to clear all of these elements, that form the cornerstones of the European bond market, through one entity can only be positive in terms of risk and collateral management.

Therefore, Eurex offers a fully integrated value chain (Trading, Clearing and Settlement) for all three markets Eurex Bonds, Eurex Repo and the Eurex derivatives exchanges (Eurex Deutschland and Eurex Zurich) and together form an integrated triumvirate for the German government bond market.

For more information on Eurex interest rate products, please visit

Footnote 1: Fixed income futures are generally based upon the delivery of an underlying bond that has a remaining maturity in accordance with a predefined range. The contract’s deliverable list will contain bonds with a range of different coupon levels, prices and maturity dates. To help standardize the delivery process, the concept of a notional bond is used. The specifications of fixed income futures are largely distinguished by the baskets of deliverable bonds that cover different maturity ranges. Eurex’s fixed income futures bear a notional coupon rate of six percent and are based on debt instruments issued by the Federal Republic of Germany. All have contract values of EUR 100,000 with a minimum price

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