Trading in equity index futures and options has been surging globally. According to the latest statistics from the Futures Industry Association (FIA), equity index volumes rose 8.3% to 5.83 billion contracts in 2014, equivalent to nearly 27% of the global market for exchange-traded futures and options and the biggest increase of any individual segment. Regionally, the volume increase has continued this year. In Europe, some 90 million equity index derivatives contracts were traded on Eurex in September, over 30% more than the previous year. Meanwhile, in the US, the Chicago Board Options Exchange’s (CBOE) SPX options contract traded more than 900,000 contracts per day on average in the year 2015 to date.
The growth has encouraged index providers to broaden their footprint in the market. One of the biggest movers in 2015 has been FTSE Russell, created when the London Stock Exchange bought index provider Russell last year. With the backing of its exchange parent the index company, which already holds a dominant position in the US small cap space with its Russell 2000 index and in the UK with the FTSE indices, the group is expanding its products into more US exchanges to compete with market leaders MSCI and S&P Dow Jones. The blend of US and European appears to have suited both companies.
“There was little overlap when combining the Russell and FTSE index businesses,” says Patrick Fay, global head of derivatives at FTSE Russell. “The combination of expertise provided a good opportunity to develop a global product set.”
The index provider has been hard at work. In September, FTSE Russell inked a deal to put the Russell 1000 index and Russell 1000 value and growth futures on the CME, supplementing the Russell 2000 options and futures already listed on the CBOE and Intercontinental Exchange (ICE). The following month the CME launched sterling and dollar futures on the FTSE 100 and FTSE China 50. Most recently, the CBOE launched cash options on the FTSE 100 and China 50. According to Fay, the expansion of FTSE Russell’s indices onto US derivatives exchanges, while facilitated by the acquisition, has been driven to a large extent by buy side demand.
“There was a lot of latent demand for FTSE 100 exposure in the US that wasn’t tapped which we hope we have addressed,” he says. “US clients don’t always have access to the UK-based futures or they prefer to trade within their US based accounts where their collateral is located, which these new products help with. A US buy-side client that wishes to gain exposure to the UK market can now use the new FTSE 100 dollar contract, for example, to obtain that exposure in a cleaner fashion.”
FTSE steps into the US
For next year the company plans listing FTSE emerging market and developed Europe index futures and options on the CME and CBOE to further creep into the US market. Whether it can disturb the established hegemony with its newer product segments is, however, open to question. The company is competing against heavyweight index providers in the form of the S&P 500 and MSCI which have long held sway in the large-cap and global index range. While the FTSE Russell products differ in their focus, breaking into this market is still ‘admittedly hard’ according to Fay.
MSCI is certainly the established heavyweight in the non-US global and emerging markets index space. Its derivatives on these indices have skyrocketed in the last few years. For example, volumes in the MSCI Emerging Markets (EM) futures, which are traded on ICE, grew to about 65,000 contracts per day in the third quarter, up 80% from the same period last year.
“Our footprint as a global index provider is bigger than any other,” says Ricardo Manrique, head of MSCI’s global derivatives licensing business. “Ours is a global franchise while the others is domestic.”
Not resting on its laurels, the index provider did a deal with the CBOE in April this year to list options on MSCI EM and MSCI Europe, Australasia and Far East (EAFE). Manrique is confident in the product’s draw.
Looking east and west
“A buy-side institution would normally hedge their global exposure with a basket of individual index products,” says Manrique. “We give them the ability to hedge globally. There is no multi-currency, country product. We are building this product.”
With its FTSE China 50 product in the US, FTSE Russell is also entering a business already heavily developed on other exchanges. The Singapore Exchange (SGX) currently has the biggest China equity index derivatives contact with FTSE’s China A50 index, a US dollar-denominated contract used by global institutional investors to hedge their equity portfolio exposure to China A shares traded on the Chinese stock exchanges. This has been the SGX’s most successful index contract this year. During the first quarter of 2015, the contract recorded futures volumes of 28.4 million, up 164% from the same quarter the previous year.
Fay is keen to point out that FTSE Russell’s China 50 uses the Hong Kong-based H shares as its underlying unlike the China A shares of the SGX. He says that the recent listing of China 50 on the Osaka exchange in Japan is validation of the interest in this index. However, whether non-US investors will be easily swayed away from the SGX contract remains to be seen.
For next year, FTSE Russell is discussing the possibility of developing a number of European-based volatility contracts with client exchanges. Once again, there is a certain amount of influence at work here.
Volatility contracts have been a boom area for index derivative providers these past few years. The CBOE’s VIX volatility index contract, the exchange’s second biggest index product, has seen about 600,000 options contracts trade on average per day this year. This year the CBOE launched new weekly futures and options linked to the VIX, the latter of which has already seen average trading volumes of about 25,000 contracts per day in October. The ability to create these weekly derivatives comes as liquidity has grown in the underlying SPX options market.
“When we launched VIX futures in 2004, people said ‘Why don’t you also launch weeklies?’ but we didn’t have the liquidity in short-dated SPX options at the time,” says Paul Stephens, global head of institutional business development at the CBOE. “Now liquidity is so massive, there is no problem launching the new weekly options.”
Still, it is not a one way street to liquidity. Much of the growth this year has, admittedly, come following volatility spikes on the back of Chinese economic worries in the latter half of the year.
“In the first three quarters of the year the market was still in a low-volatility environment – lower volatility stifles daily trading volumes,” says Tim McCourt, executive director and global head of equity index products at CME Group. “However, the market events in August were a catalyst for the return of volatility and trading volumes for equity index products across the board.”
While interest from index providers shows no signs of abating, it will be interesting to see how much of this product explosion has been merited in five or ten years time.