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Article: Eurex Spanish Euro-Bono Bond Futures - Generating Capital & Margin Efficiencies Trading European Government Bond Markets

11 November 2015 | Byron Baldwin

Introduction - cheap access to Spanish Government Bond Market Beta

On Monday 26 October 2015, Eurex launched a bond future on Spanish Government Bonds (Bonos y Obligaciones del Estado - BONOS) reflecting a delivery basket of 8.5 - 10.5 years remaining term to maturity Spanish government bonds giving the  Buy Side and Sell Side alike an efficient and leveraged access to Spanish long term goverment bond market beta. Moreover, the new Eurex Bono Bond Futures contract complements the existing suite of liquid long term Eurex Bond Futures of Bund, BTP and OAT with similar maturity delivery baskets - both the Bund Futures and OAT Futures have a 8.5 - 10.5 year delivery basket  [1] . The Bono Bond Futures and the BTP Futures has a 8.5 - 11 year delivery basket [2] , all four Bond Futures have a notional 6% coupon - offering the ability to generate alpha by trading the Bono/BTP, Bono/OAT and Bono/Bund European government bond yield spreads, relative value Bono/Bund/OAT/BTP European Government Bond box trades, and Bono versus Swap Futures asset swap trades in the most capital and margin efficient manner possible.

The Spanish Bono Futures will be margined under Eurex Clearing's innovative PRISMA portfolio margining methodology within the Fixed Income Liquidation Group consisting of the suite of Eurex Fixed Income and Money Market Futures and Options, OTC IRS, ZCIS and Euro Deliverable Swap Futures offering portfolio and cross margining benefits and savings across the products within the liquidation group - with the added benefit for the Sell Side of reduced capital regulatory requirements through the netting of exposures.    

 Below are the contract specifications for the Spanish Euro-Bono Bond Futures:

Generating Alpha - Margin & Capital Efficiencies

The launch of Spanish Bono Bond Futures on October 26 increases the ability  for both the Buy Side and Sell Side alike to generate alpha [3] in European Fixed Income - with significant margin and capital efficiencies :

  • European Government Bond Futures Spreads i.e. Bono / Bund, Bono / BTP, Bono / OAT.
  • Synthetic Asset Swaps i.e. Spanish Bono Bond Futures versus Euro Deliverable Swap Futures.
  • Relative Value European Government Bond Future Box Trade e.g. Long Bono / Long BTP / Short Bund / Short OAT DV01 Neutral.    

 

The portfolio margin efficiencies of generating alpha trading long term European government bond spread views via Eurex Fixed Income Futures are underlined via the diagrams above - for example, trading a German Bund versus Spanish Bono bond spread (in the DV01 neutral ratio[4] of long 100 Bunds : short 117 Bono) generates a 70.5% portfolio effect under Eurex Clearing's innovative PRISMA portfolio margining methodology. Similarly, a synthetic Euro asset swap credit trade, Spanish Bono Bond Futures versus Euro Deliverable Swap Futures, (a DV01 neutral ratio of long 100 Bono Futures : short 105 Euro Deliverable Swap Futures) generates a portfolio effect of 73% [5] [6].

Eurex Trade Entry Services - executing alpha strategies off exchange

Eurex Trade Entry Services [7]  allows for the off exchange transactions in Eurex Products for clearing at Eurex Clearing. Specifically, the Exchange for Physicals (EFP) Facility [8] allows for the entry of off exchange transactions in Eurex Fixed Income and Swap Futures:

For example, an Asset Manager wants to execute a German Bund / Spanish Bono yield spread which can be executed off exchange via Eurex Trade Entry Services' EFP Facility. The prerequisite is that one side of the spread transaction ('underlying transaction') has been executed either through the Block Trade Facility [9] or traded through the order book. (The minimum size for Spanish Bono Futures through the Block Trade Facility is 250 contracts).  In this example, a minimum of 250 contracts of Spanish Bono Futures could be traded through the Block Trade Facility to allow for a qualifying transaction (214 contracts) in the German Bund Bond Futures via the EFP Facility.    

Conclusion

In the new capital constrained world of Basel III and Leverage Ratio using Eurex's suite of Fixed Income Futures to gain cheap access to European Bond Market Beta is extremely capital efficient. Moreover, under Eurex Clearing's  PRISMA portfolio margining methodology, generating alpha by trading European Government Bond spreads or synthetic Euro assset swaps via Eurex Fixed Income Futures and Swap Futures generates significant portfolio effects savings due to portfolio margining - given the current capital regulatory enviroment, there will undoubtedly be a trend to a growth in Bond Futures Funds.......    

Footnotes & Links:

Link to Eurex Fixed Income Futures: http://www.eurexchange.com/exchange-en/products/int/fix

Eurex Circulars 101/15 & 158/15 re Eurex Spanish Euro-Bono Bond Futures: www.eurexchange.com/blob/1935218/08a29b5b3e3f04027817e20b240424db/data/er15158e.pdf

Eurex Circular 182/15 re Spanish Euro-Bono Futures: https://www.eurexchange.com/blob/2196282/c83cf2b180cb013d3be9d581b845b3bf/data/er15182e.pdf

Eurex Euro-Bono Bond Future Factsheet: http://www.eurexchange.com/blob/1983264/63f7b9d86689e00aff4338d3e6f6e731/data/factsheet_euro_bono_futures_on_spanish_government_bonds_en.pdf

[1] Bund Futures - December '15 & March '16 Delivery Baskets:

[1] OAT Futures - December '15 & March '16 Delivery Baskets:

[2] Bono Futures - December '15 & March '16 Delivery Baskets:

[2] Long Term BTP Futures - December '15 & March '16 Delivery Baskets:

[3] Eurex Bond Futures offer many ways for the Buy Side to generate alpha, see, 'Eurex Mid Term Euro BTP Futures: Completing the BTP Yield Curve - Increasing the Alpha Generating Opportunities for the Buy Side': http://www.eurexchange.com/blob/115868/7755727fa13f53f565e4a40c7c122d97/data/midterm_euro_btp_futures.pdf.pdf

[4] Assuming Bond Futures track the cheapest to deliver bond ('CTD') in the delivery basket, the interest rate sensitivity of a Bond Future can be expressed as dCTD / CFctd so for small changes in yield it would be: BPVctd / CFctd where BPVctd = value of an .01 change in yield of the CTD bond and CFctd = the Conversion Factor of the CTD bond . Bloomberg has a function that calculates the interest rate sensitivity of a Bond Future, 'FRSK' i.e. for the December '15 Spanish Bono Futures' interest rate sensitivity type KOAZ5<cmdty>FRSK on Bloomberg. For example, if the BPV of the December '15 Bund Future is EUR130.7 and for the December '15 Bono Future is EUR112.00, the DV01 neutral ratio for the Bund / Bono Bond Spread would be 1 German Bund Future : 1.17 Spanish Bono Future.   

[5] The portfolio effect on the Market Risk component under PRISMA portfolio margining is asymmetric e.g. there is a different portfolio effect for a Long Bund / Short Bono bond spread position compared to that of the portfolio effect for a Short Bund / Long Bono bond spread position. 

[6] Bloomberg provide a function, Futures Hedge Ratios, <FH>, to generate Bond Futures DV01 neutral spread ratios: 

[7] Link to Eurex Trade Entry Services: http://www.eurexchange.com/exchange-en/products/eurex-trade-entry-services

[8] Link to EFP Facility: http://www.eurexchange.com/exchange-en/products/eurex-trade-entry-services/exchange-for-physicals

[9] Link to Block Trade Facility: http://www.eurexchange.com/exchange-en/products/eurex-trade-entry-services/block-trades