Where in the world do cross-listed futures most frequently appear in local exchanges? Surprisingly, it is in Asia. That is according to a report from the financial industry research firm, TABB Group.
Whilst much focus may be given to cross listing of emerging market contracts in US and European exchanges, there is a sensible reason why such futures may have popped up in greater quantity in Asia, and it is that investors in emerging markets are in a more pressing need of portfolio diversification through global equity exposure.
There are now 30 cross-listed contracts in 17 markets, compared to 11 contracts three years ago. More than half of them involve an emerging market contract. The Dow Jones Industrial Average Index possesses listed futures contracts in Hong Kong, India and Japan. The FTSE 100 is listed in India and Japan. The most prolific, in terms of appearances, is the Bovespa contract, which trades on four foreign exchanges.
Cross-listed futures allow investors to trade foreign-based futures contracts on their local exchange. It makes it easier for investors who don’t have to come to terms with a regulatory framework in another country. However, more sophisticated investors could be attracted by arbitrage opportunities between the contracts in different jurisdictions.
TABB considers that in permitting the cross listing of futures, exchanges have come to the view that competition is acceptable given the chance to grab market share away from other access products, such as exchange-traded funds and global depositary receipts.
However, having a cross-listed product is only valuable if people actually use it. So what are the volumes and patterns of usage? What has been noticed is that when the ‘home’ market of a contract suffers some shock, trading of the cross-listed future is even more active in its other listed markets. This happened for Nikkei 225 contracts after the earthquake in March 2011.
A build-up of a more gradual investor interest, without the spikes from major events like natural disasters, can be spotted with the KOSPI 200 contract. Since its launch in August 2010, the volume executed on Eurex has increased to 4% of the global KOSPI 200 volume. That contract is one of the most actively traded futures contracts in the world, and that growth comes simultaneously with lower volumes at Korea Exchange.