An introduction to cash-settled contracts

Caroline Bitton, Sales Manager - Commodities at Euronext, explains what a cash-settled commodity contract is and its advantages, and gives some insight into the new durum wheat cash-settled future contract that Euronext is launching. 

Listen to the full interview. Watch the video.

What is a cash-settled contract?

A cash-settled contract is a futures contract which allows the buyer and the seller to go to the expiry date without the need to start a physical delivery process. This means they can keep their position until the last day, and they have the guarantee of exiting their position at the expiry price.

How is the cash-settled contracts expiry price set up?

The expiry price is calculated by the clearing house which uses a BMR (Benchmark Regulation) index approved by the stock market regulatory authorities. 

The clearing house calculates the arithmetic average of this index based on the last month of trading. It then gives the expiry price at which the buyers and the sellers will exit from their position. 

What are the advantages of a cash-settled contract?

To start with, the advantages are similar to the advantages of a physical delivery contract. The cash-settled contract, just like a physically-delivered contract, works as a hedging tool to manage price risk.

However, settling the contract in cash removes the complexity associated with physical delivery, which can be unsuitable for certain markets for reasons such as logistics, market size, or because of the nature of the underlying product. 

Are there any contracts of this type at Euronext?

We are about to launch a Durum Wheat cash-settled future contract which uses a French-Italian durum wheat index produced by Sitagri Index Services.

How does a cash-settled contract work?

It works like all futures contracts - according to how the position taken by the buyers and sellers develops. The only difference is the calculation on the final day of trading. For example, if you have a December expiry, it will be the index average between the 1^st and the 31^st of December.

And what about historical contracts?

The Euronext MATIF contracts, Wheat, Corn, Rapeseed, involve physical delivery and will remain the same.

Thanks to the launch of our cash-settled platform, we can extend our range and offer new underlyings that are not feasible with physical delivery. 

What is Best of Book and how does it work?

Roland Prevot, Head of Retail Cash Equity at Euronext, explains what Euronext Best of Book is, how it works and the advantages for retail investors.

Listen to the full interview. Watch the video.

What is Best of Book?

Best of Book (BoB) is a functionality Euronext launched to improve the trading conditions for retail investors - those investors who are trading for their own account as private individuals.

With Best of Book, when a retail investor trades on the exchange, they will not only benefit from a better price, but will also have more shares available to trade, compared to those available to professionals.

Best of Book has been designed to guarantee best execution to retail investors when they trade on Euronext. 

What is best execution?

Best execution is a concept implemented by regulators that obliges retail brokers to execute their clients' orders on the trading venue which is the most favourable for the investor.

To do so, the broker needs to consider two elements:

1. The trading price at which the order will be executed.
2. The cost that the broker will have to pay to provide execution.

For instance, for a buy order (an order to buy a share), the best execution will be on the trading venue where the combination of price + cost is the lowest. 

How does Best of Book work?

To build Best of Book, we asked liquidity providers to agree to provide prices at the Euronext Best Bid and Offer (the EBBO) on Euronext's Central Order Book. Those prices are exclusively available for orders initiated by retail investors.

So when a retail investor places an order on Euronext. they have access to the pool of liquidity available to all professionals, plus an additional pool of liquidity reserved only for retail investors.

We have calculated that Best of Book improves the execution price for retail investors by around €1.60 on average (in 2021 the average was €3.00).

How can I benefit from Best of Book?

First. to benefit from Best of Book, you need to trade on Euronext.

Unfortunately, not all retail brokers guarantee that they will execute their clients' order on the exchange; sometimes they choose to trade on alternative trading venues.

So before opening an account with a broker it is best to make sure that the broker is able to trade on Euronext. whether directly or indirectly, and that the broker can deliver best execution via Euronext Best of Book.