whether it be traditional exchange-listed products or OTC cleared possibilities and services.


Ewan Kirk: I have a question. I have seen currency futures on the CME for many years, and they have not taken off. They are still illiquid, and the volume remains in the OTC market. How do you think yours will be different and why do you think they have not yet taken off?


Renaud Huck: Within the incoming regulation we anticipate that the regulators will expect FX to become a more regulated market – after looking at fixed income and equity markets. I would not rule out a potential clearing mandate for OTC FX contracts, for instance, forwards or options. I am in a good position to answer your initial question on the difference between ours and the FX futures at CME, as I was the head of hedge funds and sovereign wealth funds at CME for almost nine years where I dealt with those products globally and answered those questions in front of buy-side and sell-side entities. It is true that the CME had a difficult position of being the first one to enter the space and perhaps was then not able to structure the products in the way that we at Eurex structured them.


The CME decided to structure them not from an FX spot protocol approach but from a US market approach, whereas our sterling-dollar product is sterling-dollar, as is the FX spot convention. Our products are within the protocol of the spot FX market, which significantly means that you are not in a situation where you have to face reversed quotes firstly, but also for those who are more used to spot FX it is not such a big adaptation since you don’t have to reverse the quote to see the equivalent with your FX spot price. We also decided to go for nominal values which are 100,000 of the base currency unit to avoid having amounts of 125,000, for example, which is far more practical.


Entering the market after the CME allowed us to refine the product offering. We observed that launching options on futures was not necessarily the best approach so our options are on spot.


Those who choose to use our options will have a physically delivered currency at expiry – and not in the futures contract – (our currency futures are physically delivered); the major risk in currency is not necessarily the counterparty risk but rather the settlement risk, and all our currency futures contracts are CLS-settled. CLS is the standard currency delivery system and processed within the FX space and that met our requirements. We wanted the market participants to have confidence in our product in the way they were structured but also in the delivery process if they wanted to go through delivery of those instruments.


So in a nutshell, our FX offering mimics the existing and dominant market structure as much as possible, with the idea to offer a complementary transparent and efficient exchange-listed and centrally cleared FX segment.


Antoine Haddad: Here is quick question for you regarding costs – do you have any particular features for long-term holders of currencies so they can minimize their quarterly roll costs?


Renaud Huck: It’s true and it is a very interesting question about the futures contract. If you are a portfolio manager or a small or large hedge fund, you are going to have to roll your position on a quarterly basis; it’s true that it does add on the cost. We are conscious of that and that is why the pricing of our futures is in line with the fixed income pricing that we have for other futures. So it’s now really a question of whether you are or not a member of the exchange and are paying a multiplier of what a member would pay if you are a non-member.


So in this case it’s $0.30. This information is in the public domain – on our website – so $0.30 per contract and you have the possibility to benefit from volume incentive if you are very active. Still, the question that you raised is something that we are thinking about breaking potentially by looking, for example, from that quarterly cycle of the rollover of the position to maybe going forward having yearly contracts. So we are conscious about it, but I think that this is something which is very much for the next generation of futures instruments.


Antoine Haddad: Coming back to your question about new product launches, allow me to frame my answer within the two separate activities that we have – “alpha” generation on one side, and “beta” portfolio construction on the other. Before I speak about the new launches within our alpha portfolios, I will say a few words about the environment for alpha generation. It is no secret that the extremely low- volatility environment of the recent past has not been extremely supportive for the “trading skill” alpha that we tend to look for. Looking forward, however, I cannot imagine volatility in equity markets or foreign exchange markets, for example, remaining near their 15-year lows at 12% and 5.5% respectively. The coming expansion in volatility will help two things: first it will help improve the return profile of short- term directional traders, and second, it will increase the appetite of long-biased investors for strategies that are more defensive and neutral. Both points will be supportive for the strategic development of our “alpha” arm.


The new development on that front is that we are internalizing some of the alpha strategies that we used to access via allocations to third-party funds.


Instead of allocating the assets of our pure-alpha “Aperio Master AlphaStrategy” product to external managers, we are hiring portfolio managers to run those strategies in-house. We are doing this because institutional investors, in the current risk compliance climate, are requiring full transparency from us, down to the position level, something we weren’t able to offer as a traditional fund of hedge funds. This has naturally led us to build our own internal systematic trading strategies and prop-trading teams, replacing some of the external managers with internal managers. That is one significant change in the structure of our alpha department. It is this constant effort to innovate on the multi-manager side of our business that has helped us post positive returns during the 2008 financial crisis.


On the beta front, we are launching two UCITS funds – the “Sequent GTAA – Cross Asset Risk Premia” and the “Sequent TAA – Equity Risk Premia” trading programmes. Both programmes will be long-biased, but will rely on risk premia building blocks to diversify their exposure to the various asset classes they are exposed to. Both launches will be done in partnership with CBP-Quilvest, an innovative Luxembourg-based private bank that has clearly moved away from the simple product distribution model, and that focuses on finding optimal investment and management solutions for its clients.


These launches follow a strong interest from both practitioners and academics in the improved portfolio construction that can be achieved using risk premia (sometimes referred to as factor-based indices, or smart betas). Our focus at Bainbridge has been twofold: in a first step we have embarked to create systematically the various known risk premia (traditional, value, carry, momentum, etc.) for each asset class (equity, fixed income, foreign exchange, commodities), and in a second step, we have overlaid a tactical component allowing us to change the portfolio weight for each risk premium.


Risk premia products are no longer a novelty; most bulge-bracket banks have successfully rolled out their suites of “risk premia” and “smart beta” indices, with great interest from Nordic and US pension funds. Risk premia such as value, momentum, carry (and many other premia that are well documented in academic research) provide very efficient portfolio building blocks, simply because the correlations among risk premia are generally low and relatively stable. Their use in portfolio construction can help achieve more efficient returns than those achievable using the traditional geography or market cap building blocks that are commonly used in many portfolios today.


Our two new products – the Cross Asset portfolio and the Equity Only portfolio, will use risk premia as their diversification engine. The differentiating aspect


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