Exchange-for-physical transactions have been custom-tailored over-the-counter products until now, but Euronext is about to change that.
In May, the exchange introduced an electronic order book for EFPs on equity index futures. Euronext said this new facility is the first of its type in the world and will make pricing more transparent and trade processing more efficient.
In the equity markets, investors typically use EFPs as a way to manage positions between delta one structures or to hedge their basis. In these transactions, an index futures contract is exchanged for a basket of the index’s constituent shares based on their current weighting within the index.
Rather than negotiating the trade over the phone, Euronext customers can post the trades in an electronic order book, and any resulting trades are cleared through LCH.Clearnet SA. The new facility initially is available for trading in the CAC 40 index on the Euronext Paris market or the AEX index on Euronext Amsterdam.
Euronext said this approach will reduce the operational burden of handling a complex product like an EFP contract, which demands settlement for pricing, clearing and settling both the future and cash legs. In addition, it should improve the trading environment by concentrating liquidity and making market prices transparent in real time.