STOXX’s European sector indices gain traction in derivatives
Dr. Jan-Carl Plagge, Head of Applied Research
An industry report looks into the growing market for STOXX Indices futures and options.
Listed derivatives volumes in Europe have been growing for years, as exchange liquidity increases and the breadth of products available expands.
TABB Group, the US-based research firm focused on securities markets, has published a study1 examining investor interest in this market, with a particular focus on the growth of STOXX® Europe 600 Index and EURO STOXX® Index sector indices. TABB’s interview-based research is often consulted by capital-markets participants for an examination into trends and developments affecting their industry.
Increasing investors’ possibilities
Futures and options have gained in popularity as efficient tools to implement investment strategies, leverage possibilities and hedging needs. But there is also a strong regulatory trend underpinning the shift from the age-old over-the-counter bilateral structure to an exchange-listed environment.
In particular, use of derivatives on two STOXX indices stand out among products listed on Eurex, Europe’s leading equity derivatives exchange. The STOXX Europe 600 Index and the EURO STOXX Index have lured investors seeking broad exposure across all market size, countries and sector segments of the European equity market by means of a consistent and rules-based selection and calculation methodology.
The STOXX 600 is the well-known index of stocks traded in 17 European countries. A recent report covered at PULSE ONLINE evaluated the appeal of the STOXX 600 as a liquid and tradable index for cash equity investors in the pan-European market. The establishment of an ample and deep market for derivatives based on the index cements the STOXX 600’s position as a tool for portfolio construction in Europe.
The EURO STOXX, meanwhile, is a subset of the STOXX 600. It comprises 293 members from 11 Eurozone member nations.
According to preliminary Eurex data cited by TABB, derivatives on the STOXX 600 and the EURO STOXX have grown 35% a year on average between 2005 and 2015, and demand grew further and faster in 2016 to a new record of 100 million contracts traded.
But it is the 19 sector sub-indices tracking different industries within these two benchmarks that have gained traction as vehicles to approach targeted views.
About 42 million EURO STOXX sector futures contracts exchanged hands in 2016 in Eurex, up 63% from the previous year, while trades in EURO STOXX sector options jumped 125% to 25 million. For the STOXX 600, trades on sector futures contracts jumped 50% in 2016 to 9.4 million, based on preliminary data, while sector options trades rose 38% to 1.9 million contracts.
Growth in EURO STOXX sector derivatives trading has been heavily concentrated in one industry: banks. This can be explained by the importance of the banking sector in the Eurozone equity market, but also in the economic narrative of the region. Concerns about the capital strength of Italian and German banks, and about the detrimental effect of negative interest rates, were a principal headwind for broad market performance in 2016.
In the case of the STOXX 600, trading volume is more evenly spread. The banks index garners the most interest but the oil & gas and basic resources measures follow in not so distant second and third places.
TABB also highlights the growing importance of cross-border investment, and in particular of US investors’ demand, as a source for growth in European derivatives. The report was based on interviews with European and US banks, asset managers and other market participants.
Further growth ahead
European derivatives markets are poised for further growth as liquidity drives liquidity. At the same time, regulators have raised scrutiny over banks’ capital and on the risk-taking activities of intermediaries such as market makers – forcing a transfer of previously risk positions and opaque trades onto exchanges.
As global investors raise allocations to Europe, they will find a deep market in cash equities and derivatives to trade, complement or hedge their views.
For a copy of TABB Group’s “Eurex Derivatives Markets: Renewed Growth as Sector Demand Emerges” report, please click here.
1“Eurex Derivatives Markets: Renewed Growth as Sector Demand Emerges”, TABB Group, December 2016.