According to the CEOs of Eurex Frankfurt, Michael Peters, and Eurex Clearing, Erik Tim Müller, the priorities for market participants in the international derivatives business are changing. "Risk management is gaining significant importance," says Müller. Market participants are no longer just concerned with the latency of a trading system — and thus not just about being a few nanoseconds faster.

Since the banking crisis, there has been an increased sensitivity to risk management through the central counterparty (CCP). "Risk management will become even more crucial for market participants in the future, especially due to the various crises," reaffirms Müller.

Peters underscores that the advantages of central counterparties were evident during the banking crisis. While the investment bank Lehman may have had a high exposure to the clearinghouse, it was managed without issues. In contrast, numerous over-the-counter (OTC) swaps, that were bilaterally agreed upon, were not adequately collateralized. "Counterparty risks were very difficult to assess," adds Eurex's CEO. Müller agrees, stating that the 2008 banking crisis was a turning point because the futures markets worked reliably with clearing. "What caused massive problems for some institutions were the uncleared derivatives and exposures between individual global market participants."

In 2009, during a meeting in Pittsburgh, governments of industrialized nations agreed that there should be neutral risk managers between market participants who manage risk and demand collateral. "In response to the global financial crisis, the U.S. enacted Dodd-Frank, and the Europeans passed the EU Derivatives Regulation (EMIR)," Müller recalls.

To meet the increased need of market participants to manage risks effectively, Eurex provides a range of solutions. The exchange demands two main types of collateral from market participants. Variation margin ensures daily mark-to-market reconciliation, preventing significant liabilities from accumulating between individual market participants. Initial margin, on the other hand, covers risks from future market movements. "The precise amount must be carefully calibrated to avoid stifling trading motives on one hand and to prevent the need for rapid margin increases and pro-cyclical actions during a crisis on the other," explains Müller. "Our system is highly transparent, significantly facilitating liquidity planning for market participants."

Eurex has seven lines of defense, including not only the two types of margins, but also a default fund funded by participating clearing members. The default fund addresses tail risks not covered by the initial margin. In case of emergency, the clearinghouse can also provide its own resources. "Ultimately, market participants and the CCP share a common interest — effective risk management through the CCP," emphasizes Müller. "So far, we have only had to rely on the first line of defense, even in the most critical moments, making a significant contribution to system stability in crisis situations," notes the CEO of Eurex Clearing.

As another component of the risk architecture there are concentration margins that aim to prevent individual participants from taking overly dominant positions in certain products. The central counterparty must ensure that it can liquidate the position of a defaulting market participant in the case of a crisis. "Moreover, we are the only one among the four largest CCPs in the world with a banking license, even though EU regulations do not require it," Müller points out. It allows Eurex to "safely invest customer funds" and provides guaranteed access to Euro liquidity in case of need. "In a crisis, such things may be vital."

Peters asserts that his organization has set global technical standards "and successfully advanced standardization in the product area in cooperation with customers" over the past 25 years, such as launching dividend and total return derivatives. Eurex has ensured that capital efficiency through netting positions to the benefit of market participants can be achieved, for example, due to correlations between Euro Stoxx, DAX, and MSCI derivatives.

When looking ahead, Peters and Müller are very optimistic. "We have laid the groundwork for further growth," both believe. However, future growth may occur in different areas than before. There are significant opportunities due to the interest rate turnaround in the fixed-income sector, such as in swap clearing or the repo business. Even in the foreign exchange market, not just in equities. Some bond derivatives are still not cleared, and clearing plays only a subordinate role in the forex market. "There is still a lot of room for growth," states Müller. "We also want to leverage our recently started partnership with Google Cloud to explore new approaches to the underlying IT architecture."

"It is important to make the architecture even more flexible," Peters explains. "Recently, we implemented an even more agile trading architecture, which allows us to introduce our products faster." In this context, he recalls the daily expiring options on the Euro Stoxx index, which were introduced at the end of August and received high market acceptance.

Müller also provides an outlook for the Euro clearing. "In the Euro swap market, we have now achieved a 20% market share, primarily due to our partnership programs." There is a declared intention by the EU Commission, the EU Parliament, and the European Central Bank to accelerate the relocation of swap business from the UK to the European Union, so that decisions regarding the Euro are not made solely by regulators in third countries. Currently, negotiations are underway at the European level for the amendment of the EU Derivatives Regulation (Emir 3.0), which is expected to be adopted in the first quarter of next year.

On the 25th anniversary of Eurex, the two managers look back and note that "Soffex and DTB were a perfect match." Both founders of Eurex were equally technologically inclined and had the same goals. Eurex has succeeded in evolving "from an inconspicuous pioneer into a global powerhouse." It is one of the few global market operators that design and build their own infrastructure.

"At that time, we traded nearly 1 million contracts, today it's eight times as much," Müller illustrates the dynamic growth. "In 1998, we had around €100 million in revenue, today it's more than €1 billion." Eurex resembles a significant share of Deutsche Börse's market value and is the leading marketplace for European benchmarks: The Euro Stoxx 50 contract serves as the benchmark for Europe in stock indices, and Eurex has also become the market leader in worldwide MSCI indices. "The Bund Future is the benchmark for European government bonds, and the futures markets for French and Italian government bonds now run through Eurex," adds Müller.

Soffex and DTB were the only two stock exchanges at the time that had a fully automated exchange and a fully electronic integrated clearinghouse. Back then, traditional floor trading was prevalent almost everywhere around the world. "With our fully electronic infrastructure, we were able to offer location-independent access as pioneers," says Müller. "We were disruptors in the truest sense." Many market participants saw that the fully electronic system was more transparent and much more efficient than floor trading.