Quick Takes: A new look at €STR Futures

Ali Curi: Hi everyone, and welcome to ION Markets Quick Takes. I’m Ali Curi, and every week, along with my guests, Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog. Let’s get started. Hi, Amir. Hi, Chris.

Amir Khwaja: Hi, Ali.

Chris Barnes: Hi, Ali. How you doing?

Ali Curi: I’m doing great. It’s great to have you back.
Chris, let’s start with you. What are your Quick Takes for this week? Which headline from the Clarus blog would you like to discuss?

Chris Barnes: All right, Ali, I’ll be talking about “A new look at €STR Futures.”

Ali Curi: Sounds great. Let’s have at it.

Chris Barnes: All right. This might be a stupid blog to try and do a podcast on because the whole reason I wrote this blog is that our Clarus software with our data can make really nice looking dashboards, but if I’m talking on a podcast, you can’t see the really nice dashboard for the market share. But as soon as we published this blog, we got lots of comments on LinkedIn and clients reaching out. It really makes sense to highlight this blog to our listeners to make sure that no one’s missed it.

In case people are not aware normally in futures markets. You really have one main futures contract and one exchange that sees all of the trading. It’s a very rare situation to be in, whereby exchanges are actually competing against each other in identical products. And what we’ve got in €STR Futures at the moment is CME, Eurex, and now ICE all competing to be the number one venue for €STR trading in futures. When we look at €STR as a whole, across the whole of the Euro rates market, it sits at about 35 percent of volumes. But if you look at just futures you’ve still got the Euribor future out there, that trades at ICE and only at ICE, and only about 2 percent of volumes trade versus €STR in rates futures for Euros. This is all for money market futures, excluding bond futures completely. So this year we’ve basically seen CME and Eurex both launch €STR futures.

And in September and October volumes had continued to grow all year up to about 500 billion euros equivalent each month with a 50/50 market share between CME and Eurex. And then the 1st of November happened. And as it turns out, ICE had introduced a new program to motivate market makers to start trading €STR futures.

It looks as a result of this program that ICE have released, ICE then immediately got a 37 percent market share on day one of trading. So when I wrote the blog, we had three days worth of data for those first three days of November. We were then almost in an equal split between CME, Eurex and ICE, with ICE just about nudging into first place at 37 percent of the market.

It is worth noting that’s all based on new volumes traded. When you look at the open interest Eurex actually has a very small open interest whilst 88 percent of the open interest as at the end of October was based at CME. So this looks like a battle that’s going to run and run for a while.

We don’t know how long the programs from each exchange will necessarily run for. Eurex also have an incentive program in place that covers both money market futures and also OTC trading. So it looks like it’s going to continue to be a hot topic on the blog. So I wanted to make sure that our readers, our listeners are aware of it.

Amir Khwaja: Great. Thanks, Chris. Great dashboard in the blog. Looks very nice. I just say with a new risk free rate, €STR, each of the exchanges has a unique strength and believe they can compete to create the contract that’s going to take all liquidity. So it’s a CME, ICE, Eurex have all strengths and I guess a real chance of becoming the €STR contract.

It’s early days and we’ll see what happens, but I guess, do you think, how quick will the battle be? Will it be a case of the 1st December IMM Roll volume will suddenly move to, for the March to one of them? Or do you think it’ll keep going longer? Because liquidity likes to be in one place, right?

Chris Barnes: Agreed. It is so hard to say. I think we’ll obviously be keeping a close eye on the data. I think we’ll get a better idea on the speed of the move when we start to see how big the open interest is at ICE after a month or two months of trading. Precisely as soon as you’ve said, CME can potentially cross margin these against SOFR futures, the biggest contract out there. ICE can potentially cross margin these against Euribor, ICE as the incumbent, everyone who trades Euro futures already trades ICE. That is a massive advantage. And then of course, Eurex is the onshore center of Euro trading has the massive franchise in Euro bond futures; Schatz, BOBL, Bund, et cetera.

So there’s different reasons for each of the exchanges to be successful. The only thing I would say is that we saw that same dynamic with SONIA futures as well. ICE was the incumbent that already had short sterling. CME made a grab again, based on cross margining versus Euro dollars. At the time, Eurex was looking at breaking into Euro swaps trading.

Again, there was a even curve global the startup exchange whereby there was a clearing of LCH for those. So lots of things have been tried to be that kind of number one center of trading for these futures. Historically, we’ve always seen the incumbent win out. ICE have had a very strong start. For me it’s really a question of following the data. When you look at OTC markets, the transition from Euribor to €STR has been very slight. There isn’t any sign that volumes in Euribor trading in futures is going down or is going down quickly. So this could be one of those things that we could have all three competing until there’s actually a regulatory push and some type of cessation for Euribor.

Amir Khwaja: Interesting. Yeah, that is interesting. So I guess, so in the short term, exchanges need to attract market makers and volume. And they have these incentive programs that give you rebates or fees, or I guess you can earn buying liquidity on a particular venue and a product. But long term, those only last a period.

I guess the bet there is if you get initial liquidity, it remains there, if you have a better incentive. But I guess the long term comes down to where will the current participants and what are the margin offsets really valuable, right? Is it against SOFR? Is it against fund features? Is it against Euribor?

And how price is made, right? So if prices are really made off of the short of the Euribor contract, yeah, it’d be very interesting. My feeling is things can move very quickly. So I don’t know how long those, how long can incentives last? Money, liquidity, people can make prices on the two that are comparable because they are identical contracts.
The prices should be extremely tight.

Chris Barnes: Exactly. I think, short term, what you’ve got to look at is that the OTC market is a 50 percent €STR versus Euribor. Now that we particularly have so many exchanges competing, there’s no reason why futures shouldn’t also be a 50 percent €STR volumes.

So there’s obvious upside for all of the exchanges in getting new volume for these products. I just think it’s way too early to make any kind of bets or draw any conclusions on which might be the dominant exchange in the future, make sense?
Ali, I think that’s about all I had to say this time on €STR. I think I’ll probably be looking at these market shares monthly or quarterly.
If any of our readers and listeners have any questions, please just reach out to me.

Ali Curi: Thank you, Chris. And please share with us again, the title of your blog post.

Chris Barnes: That’s a good question. It wasn’t my blog on, “Is Chris Barnes a Robot?” It definitely wasn’t that one. It was “A new look at €STR Futures” this time.

Ali Curi: Great. Thank you so much. That works. Chris, Amir, thank you both for sharing your Quick Takes. Let’s do it again next week.

Amir Khwaja: Thanks, Ali.

Chris Barnes: Thanks, Ali. Speak again soon.

Ali Curi: And that’s our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn.
Until next week, thank you for joining us.