Eurex has shaded Euronext.liffe in the race to be first to introduce a futures contract on overnight euro interest rates (European Overnight Index Average, or EONIA). The exchange announced today that it will introduce EONIA futures on 27 January. Euronext.liffe will start trading an identical contract a week later.
A future on overnight rates is an idea which has kicked around since the euro was introduced, but it is only now that the two exchanges have become convinced demand is strong enough. The EONIA has now established its benchmark position since being introduced on January 4, 1999 and forms the basis for the bulk of activity in the European money market business of the banks. Moreover, the EONIA also functions as the underlying instrument for numerous OTC derivatives. At the short end of the yield curve, the swap market is based almost exclusively on the EONIA as a reference rate.
Eurex says that, apart from giving traders the opportunity to trade around changing expectations in European monetary policy, there are bi-monthly fluctuations in the overnight euro market which generate a need for hedging: the last few days immediately preceding the minimum reserve deadline (the banks have to meet their specified minimum reserve requirement by the 23rd calendar day of the month, at the latest) and the last trading day of the month.
Eurex expects the new contract to appeal chiefly to banks and institutional investors who want to hedge their short-term interest-rate risks relatively cheaply. “The EONIA future is a very useful product, as one can see from the above-average growth in the swap market, especially in the short-term segment,” says Eurex CEO Rudolf Ferscha.
The Eurex EONIA future will be based on the monthly average of the reference rate computed daily for overnight transactions in the interbank market, which is calculated by the European Central Bank on the basis of actual transactions. It also rounds out the Eurex product portfolio of one-month and three-month Euribor futures at the short end of the yield curve.
The new futures contract has terms of one to 12 months with monthly maturity dates, the minimum price movement is 0.005 percentage points. The new products will be traded at Eurex from 8:00 a.m. to 7:00 p.m. CET. Designated Market Makers who quote binding bid and ask prices will provide for underlying liquidity in the EONIA future.