How has recent market volatility impacted CME’s European business?
The volatility that we’ve seen recently and over the last year has manifested itself in our business with an increase in average daily volume in contracts traded. We’ve especially seen the volatility in interest rates, equities and in oil markets. If you look at the overall impact on CME Group, last year was the biggest year in history. We traded on average 23.3 million contracts per day, up 19% from 2021. That was last year, but it has continued into this year, with events like SVB, where we saw the highest trading day ever on the exchange, with over 66 million contracts traded on 13 March.
If you drill down into individual products, we saw records in our SOFR contract, both in futures and options. And that’s quite remarkable because SOFR is the contract that replaced our Eurodollar contract, which was based on Libor. So this has shown its metal already very early on in its existence as a replacement for Eurodollar futures. We had a very strong year in equities last year, and also on 13 March, achieving our highest ever equity index futures and options volume day at 17.8 million contracts.
How can investors better manage their risk exposures amid these volatile market conditions?
Volatility is the reason you hedge. Recently, we’ve multiple dramatic events in the market occur in a short space of time. Previously, that used to happen only once or twice in a career. This means that you have to manage risk more than ever. In other words, it is no longer optional to manage market risk.
If I think about these event risks, whether truly unexpected events or those that are scheduled like an FOMC meeting or the employment figures in the US, clients have adopted portfolio strategies to manage around those. For example, we have seen strong growth in our short-dated options, which allow the creation of option structures and trades to manage various types of event risks. CME Group is supporting these changing risk management requirements by launching new options products for our clients to manage event risk, in particular offering more short-dated expiry dates. Historically we would only have a monthly option expiry, but now many products across asset classes will have expiries multiple days per week or even every day of the week as in our equity indices.
Equity index and foreign exchange products have seen continued growth this year. What are the underlying factors that are driving interest in this space?
On 13 March when markets were very volatile, we experienced an equity futures record across a number of our equity indices including the E-mini S&P 500, the Russell 2000, the E-mini Dow Jones and the micro E-mini Dow Jones. CME Group is where the market came to trade those indices, specifically to trade that risk. Off the back of the index volume growth and related risk management needs, we’ve launched new products that specifically start to tailor towards different underlying risks, such as sector futures. We launched these to allow our clients to manage risk in subsets of the US economy such as the banking sector. For example, for the volatility around SVB and the banking sector, if as an investor, you’re exposed to that specific sector and you want to manage that risk, the S&P banking index future would allow you to help manage it more precisely. Another driver that we’ve seen is the implementation of Uncleared Margin Rules (UMR). Our Adjusted Interest Rate (AIR) Total Return futures on US equity indices are designed to give traders total return exposure with an overnight floating rate built in. The contract provides the economics of an equity index total return swap with the margin efficiency of listed futures.
On the FX side, we also saw a record year for our exchange-listed foreign exchange products last year. In March, we saw a record day for our FX suite of products, trading $296 billion notional in one day across over 3 million contracts. This is a result of regulation like UMR, but also SA-CCR which is a new standardised approach for counterparty credit risk management that is being adopted across the industry. People are moving from OTC FX into listed FX, where it helps them manage some of those changes in the market.
What trends do you expect to see in the derivative space over the rest of this year?
I don’t believe the frequent episodes of high volatility is over. For that reason, I think we’re ideally positioned with our product set to help clients manage market risk or indeed, in such an environment, there might be opportunities for them as well to capitalise on the market movements. That’s one big trend that we see.
Another trend we expect to continue this year is the focus on ESG and sustainability efforts. That is something, particularly in EMEA, that is top of mind for investors and that will continue to grow. We’ve launched a number of products into the ESG space that help clients manage these risks, such as an ESG version of the S&P 500, futures for voluntary carbon markets, and futures around battery metals for example. I think that’s going to be a theme for this year as well as future years.