At a Glance
- As volatility re-emerges, more stock indexes from across the globe come into play
- Futures traders looking for more access, precision says CME Group's McCourt
Equities markets have been rocked by volatility to start 2016. In the U.S., most news coverage revolves around the Dow and S&P 500 indexes when stocks fall, but global markets are more intertwined than ever. Major events like the drop in oil prices and slowing of China’s economy have an effect on investors everywhere, and on stock indexes of all sizes around the globe.
This past summer, CME Group announced a licensing agreement with FTSE Russell, home to several small cap and internationally-focused indexes. From a futures perspective, the agreement provides an established venue to trade global indexes. But as CME Group readies to launch the latest of these futures products – E-mini FTSE Developed Europe and FTSE Emerging Index, making a total of eight new futures products – most equities markets are still reeling from the shocks of a more intertwined global economy. We sat down with Tim McCourt, CME Group’s Global Head of Equity Products, for a more in-depth look into CME Group’s strategy behind this agreement with FTSE Russell and why it might appeal to global market participants.
In a volatile environment, how might access to the new FTSE Russell indices help? Do you see it easing investors’ minds in some way?
With volatility returning to the equity index market, one trend to be on the lookout for is you may see more market participants needing increased precision in how they trade the market. The U.S. market has been a one-way pervasive bull-run market since 2009. Therefore, a lot of people are happy to trade the S&P 500 as a proxy for all things U.S. As volatility returns, you’re going to care more about the distinction between S&P and Russell 1000 for large cap, Russell 2000 for small cap, Nasdaq for tech.
This is exciting now because we’re diversifying our index offering at a time where we think the needs of market participants to manage their diverse index exposure will increase.
Ron Bundy, CEO of Russell Indexes and Tim McCourt, CME Group Global Head of Equity Products, discuss the FTSE Russell/CME Group partnership
And these futures contracts mean easier access to more indices?
Russell 2000 is small cap and FTSE is a host of country-specific and regional or multi-country indices. It’s helpful for participants to have that in one place because they can access global benchmarks at one clearinghouse and exchange saving the end user money and making things more capital efficient.
Without futures on Globex, it’s almost impossible to replicate these indices. You might have to use a more capital intensive ETF or OTC structure. This is about futurization of other markets. The FTSE Emerging Market, The FTSE Developed Europe and the China 50, it’s the first time there will be a future on those indices. It will be better for customers in the long run as we increase the transparency in these markets.
That goes to the point of margin efficiencies. For example, because we have a Nikkei contract, a customer that needs to trade FTSE China 50 will get about a 30 percent margin offset against Nikkei. The more you pool the risk you’re managing there are more capital and operational efficiencies in dealing with one clearinghouse.
Five of the FTSE Russell Indices launched since last year are non-U.S. indices. Why is it important to have a regionally relevant contract?
There are two points to that. One is country-specific benchmarks. For example, FTSE 100 is the benchmark of 100 large cap stocks that trade within the U.K. The other point is something like FTSE Emerging Markets. It’s very difficult to replicate that index using cash equities because you would need the ability to trade in 22 countries. So the fact that you can access these two broad-based futures on a platform like Globex that everyone is already familiar with, it removes a lot of the headaches around trading those benchmarks either country or region-specific.
These are new indices to a lot of market participants. What’s the advantage for them in having access to each of these different markets? What do they gain that they didn’t have before?
A lot of it is about the rising importance of emerging markets or the Chinese market in the equity ecosystem. These are areas of interest that have grown in the last decade, and they are much more relevant in the equity landscape then they were five or ten years ago. Because of that, more people want to access and trade these markets and use them as benchmarks.
Are these particularly attractive products for European or Asian investors since they are more familiar with these indices?
A lot of the ways European and Asian investors can access those products are through a U.S.-centric model whether through ETF or OTC products driven by sell-side banks. So the fact that these products are now offered on Globex 24 hours a day across the globe, and we’re offering things like BTIC, where they can get the official cash close of that index. That should provide an easier access point than going through the U.S. ETF market.
For example, FTSE China 50 is a future on the index that FXI, the ETF, also tracks. FXI trades about $1.4 billion per day. FTSE Emerging Market, the ETF is VWO, which trades about $500-600 million per day. A lot of that trading is centered around the U.S. market and U.S. hours. Futures are much more 24-hour products, which accommodates the schedules of traders everywhere.
Given that these are indexes that track equities around the globe, could you talk about which events are most likely to impact equities on a global macro scale?
The Fed and when and if they plan to hike rates further is one big factor with global implications, especially in some of these indices with an FX component. And the other big thing to watch is China. How does that market react to what’s happened with the recent selloff? What are some of the reactions to some of the policy changes around short-selling, for example? And, of course, earnings remain something to watch.
You mention the Fed, and that’s something that impacts all markets. Can you explain how their decisions — mostly the pace at which they hike rates – specifically affects equity markets?
First, the interrelatedness of equity markets is much more global now than it has been previously.
So when rate policy changes it tends to drive asset allocation shifts where people need to move in between equities and rates. That’s a global phenomenon. For example, in a zero interest rate environment people were likely investing in U.S. equities because of the dividend yield of the S&P 500. If rates go up, and the longer-term part of the curve reacts, that might be more attractive than keeping your money in U.S. equities.
The second thing is a fundamental belief in terms of how individual equities are priced as a result of the present value of future cash flow and future earnings, and as rates rise companies that are also long cash or have cash earnings, there should be a more fundamental impact on equity valuations as a result of rising rates.