Investment banks use this product alongside their activity in structured products.
Euronext has said it is targeting banks and hedge funds with the launch of extended maturities for the total return future based on the French blue chip index, marking the latest addition to a successful new product set from the European exchange group.
Euronext said it extended on Monday October 10 maturities on the CAC 40 total return future (TRF) out to ten years to reflect the requirements of banks and hedge funds. The existing TRF, launched in 2018, offered maturities to five years.
There is institutional demand from banks who use this product alongside their activity in structured products - Charlotte Alliot, Euronext
Charlotte Alliot, head of institutional derivatives at Euronext, told Global Investor: “The product developed fast, and we have since seen a need for a longer-term maturity from two different communities. On the one side, there is institutional demand from banks who use this product alongside their activity in structured products, many of which last more than five years.”
Alliot added: “Since launch, we have seen more and more hedge funds participating in this contract, using it in strategies alongside the repo curve. The hedge funds have also expressed interest in longer-term maturities.”
The extension of maturities, announced on Tuesday, offers clients more flexibility when trading the CAC 40 TRF, the first total return future based on a single country index.
Investors and traders like the TRF because it offers same attributes as a total return swap, namely dividend and interest rate hedging, but in a listed product that is less capital intensive than the over-the-counter (OTC) swap.
Alliot said: “Because of regulation, trading OTC is becoming more expensive, and firms have to post important amounts of collateral. And since this listed version of the total return swap offers very strong offsets with the standard CAC40 future, it was a no brainer for us to repatriate the OTC flows in a listed environment.”
Since launch in 2018, the CAC 40 TRF has traded over 700,000 lots, making it one of Euronext’s most successful new products in recent years. Euronext’s only total return contract is also the group’s fourth most popular equity index futures contract behind those on the main French, Dutch and Norwegian blue-chip indices.
Alliot said the TRF is also proving popular due to the current economic environment dominated by higher central bank interest rates: “The total return future is also an interesting tool if you want to manage interest rate and dividends in one single contract.”
The Euronext head of institutional derivatives said she and her team are also looking at extending the TRF footprint to other indices. Euronext is the home of futures on the Belgian, Dutch, French, Norwegian and Portuguese indices, reflecting the group’s broad European coverage.
Alliot said: “We are not planning to introduce a TRF on the AEX index for example because, in order to have a well-functioning TRF, you need an active structured products business in parallel, and the AEX does yet not have that. We are however looking to add TRF for some of the other benchmarks within the group.”