Eurex adds five sub-sectors to synthetic property trading

Exchange hopes ability to trade sub-sectors will boost trading volumes

Eurex has expanded its range of property derivative contracts by listing five UK market sub-sectors based on IPD quarterly indices.

The sub-sectors, or ‘segments’ as the Eurex derivatives exchange calls them, are: shopping centres, retail warehouses, City offices, West End and Midtown offices, and south-eastern industrials. They were listed on the exchange this month.

As with Eurex and IPD’s All- Property and retail, office and industrial contracts, the new contracts are based on total returns in a calendar year and one contract has a £50,000 notional value. Buyers of annual exposure pay a fixed price, with sellers receiving a fixed price.

Property derivatives trading has been moving away from billateral swaps, where parties trade directly with a known counterparty, to Eurex’s ‘on exchange’ futures product, where trades are cleared centrally, dramatically reducing counterparty risk.

In the past four quarters to the end of Q1 2013, Eurex’s market share has been much higher than the volume of swaps. But annual total property derivative volumes traded have been falling since 2009 and were only £780m in 2012.

The lowest ever quarter was Q3 2012, when volumes fell to £53m, although they recovered to £259m in Q4 2012 and are expected to be at a similar level for Q1 2013 when the figures are published later this month. Participants hope that the opportunity to trade sub-sectors will help the market to recover.

Charles Ostroumoff of broker BGC said: “Property derivatives is evolving from an interbank, swaps market to an exchange, end-user market. It’s a trend that began about 18 months ago to the point that at least 90% of trading is now on exchange.”