How does Cboe view European options markets and the potential opportunity?
Natan: Make no mistake about it, Europe’s options markets are under-developed. A key trend over the last decade has been Europe’s poor performance versus the US, specifically in terms of options volumes and liquidity (see chart below), creating problems for market participants and end investors. We believe a vibrant options markets, particularly for single stock options, which allows investors to hedge their equity exposures and thereby boosts liquidity in related products, should be viewed as an important part of the overall health of EU capital markets. Europe’s fragmented market structure has contributed to its weak volumes, with multiple exchanges and clearing houses operating vertical silos, leading to high operating costs and poor capital and margin efficiencies. When combined with the predominance of OTC/off-screen trading in European options, new participants – particularly systematic firms – have been deterred from entering this market. Addressing these weaknesses represents a significant opportunity, and through Cboe Europe Derivatives (CEDX) we’re aiming to grow European options volumes again with a pan-European ecosystem – in terms of trading, clearing, and market data – that simplifies access to and dramatically reduces costs for those wishing to access this market.
What single stock products is CEDX introducing and what is the value proposition?
Iouri: It is obvious from volumes that Europe’s options market structure is failing market participants and investors. That is something CEDX is looking to rectify through a single access point to pan-European products, on-screen liquidity and unrivalled post-trade efficiencies. CEDX launched in 2021 offering pan-European equity index derivatives and will expand into single stock options on leading European companies from 6 November 2023, subject to regulatory approvals. Phase one will include options on 133 underlying stocks, covering companies from 12 European countries. These initial listings amount to 70% of current ADV and open interest for the top 600 European equity options. We believe a screen-led, pan-European trading model is key to reviving options volumes, by enabling the implementation of new strategies in Europe and operational simplicities for participants. We are working with a list of blue-chip clients to be ready to trade single name products from day one and are looking to add further products from 2024 onwards to build the most comprehensive equity derivatives ecosystem in Europe.
What are the post-trade efficiencies CEDX is offering in single stock options?
Vikesh: Cboe Clear Europe, one of the largest pan-European cash equities CCPs, clears CEDX’s existing index derivatives and will be expanding its services to support the exchange’s single stock options launch in November 2023. We will offer significant capital efficiencies to participants by operating a single, pan-European margin pool, with offsets immediately available between CEDX’s index and single stock products. For single stock options clearing, the use of underlying stocks as collateral will provide offsets against matched equity option positions, delivering a potential initial margin reduction for a covered call position of around 70%, according to our initial estimates. Furthermore, stock settlement (on options exercise and assignment) will take place in domestic CSDs, removing unnecessary costs and allowing for settlement netting with relevant cash equities transactions.
What elements does Cboe bring to the table to make CEDX a success?
Natan: As operator of Europe’s largest stock exchange by value-traded and market share, we know what it takes to build a successful pan-European exchange. We believe many of the same principles that have led to our success in equities can be replicated in derivatives. In equities, we have focused on innovative, pan-European solutions that simplify the landscape and lower costs for intermediaries and end investors. That experience, when combined with our US options expertise, world-class technology and ownership of Cboe Clear Europe, gives us an unrivalled position from which to create a leading, pan-European derivatives marketplace. That was why we launched CEDX in the first place and its expansion into single stock options will be one of the biggest initiatives Cboe has ever undertaken in Europe. That reflects our long-term commitment to European derivatives but also our deep conviction in the size of the opportunity in equity options and the value proposition we’re bringing to market.
