The Hedge Funds Club had a chat with Roeland Pot, Managing Director of Flow Traders in Hong Kong about the derivatives markets, changing regulations and new business opportunities. In partnership with Eurex.
How has the MSCI derivatives market (transition from swaps to futures) changed in recent years and what is your outlook for the near future? Are there any growth drivers?
Increased regulatory scrutiny over recent years has led to larger capital constraints for investors as well as an increased need for transparency. This has resulted in a significantly larger uptake of regulated, listed and centrally cleared instruments and thus caused investors to move away from swaps and into futures. Flow Traders expects these trends to continue the following years. With regards to the MSCI derivatives market specifically, we’ve seen a major increase in open interest and turnover both off-screen as well as on-screen, leading to tighter bid-offer spreads and therefore reducing costs for investors significantly.
How is Flow Traders poised to capture this growth?
As a technology company operating in financial markets, we use our proprietary technology platform to provide liquidity in thousands of regulated, listed instruments and are therefore well positioned to capture expected future growth. We also provide liquidity to institutional counterparties off-exchange across the globe, such as pricing blocks in MSCI futures. Market participants benefit from higher execution quality and lower overall trading costs, while the markets benefit from greater efficiency and more transparency.
Will listed MSCI Futures become even more relevant for the buy side due to the next chapter of Uncleared Margin Requirements (UMR) regulations coming September 2019?
This indeed is to be expected. In response to the global financial crisis of 2008-2009, the G20 agreed to a financial regulatory reform agenda covering the over-the-counter derivatives markets and market participants. Among these reforms were recommendations for the implementation of margin requirements for non-centrally cleared derivatives. The final phases of UMR will occur on September 2019 and 2020, when a large number of additional counterparties will be in scope for posting initial margins on their non-centrally cleared OTC derivative positions. As of that moment, initial margins on centrally cleared derivatives, such as MSCI futures, will be significantly lower vs non-centrally cleared OTC derivative positions. These regulations are therefore meant to incentivise investors to further move away from OTC derivatives and into centrally cleared instruments, such as MSCI Futures.
What are, in your opinion, the main strengths of the Eurex MSCI derivatives offering?
MSCI indices are some of the world’s most widely tracked benchmarks, with more than US$12 trillion linked to them. Eurex offers a comprehensive suite of futures; 117 MSCI futures are available, covering Emerging Markets (EM) and Developed Markets (DM) in different index types (NTR, GTR and price indexes) and different currencies (EUR, USD, GBP, JPY), which are all tradeable for over 20 hours a day. This large offering helps fund managers as well as other investors facilitating in- and outflows of funds, hedge existing equity exposure and enhance portfolio performance. Flow Traders is the leading liquidity provider for Eurex in market making the full suite of products on screen as well as directly to counterparties, by providing competitive quotes on blocks upon request. For more information on Flow Traders and Institutional Trading please refer to our website: www.flowtraders.com