Exchanges Set Pace on Stock Index Products
Kharouf, Jim, Futures (Cedar Falls, IA)
With the upcoming single currency, European exchanges are developing new Euro and pan-European stock indexes. Once again, it is becoming a race among the top exchanges for market share in the next growth area of derivatives.
Exchanges know all about the race for products, but each has its own style of how to run it. Now European exchanges are teaming up with the top names in index products to try and grab an edge in the competition for the European equity indexes. The market, which has seen a few false starts, appears ready for Euro- and pan-European based indexes.
The futures exchanges in Amsterdam and London have teamed up to trade the FTSE Eurotop 100 futures and options, while Dow Jones and the German, Swiss and French allied in February to launch a slew of new index products. Meanwhile, the Belgian exchange and two European financial publishers forged a new company to introduce a Euro and pan-European index family of its own.
With the incoming Euro set to debut Jan. 1, 1999, Europe is an incubator of new equity and fixed income products. May is particularly important because the countries of the European Monetary Union (EMU) will be announced; 11 are expected to be admitted. European equity indexes have been introduced in past years, but with the EMU group set, currency risk will be eliminated for the Euro-based products. And given the steep rise in national index futures volumes across Europe, exchanges and traders believe the timing is right for a few new products.
Stoxx stuffer Perhaps the biggest move into Euro and pan-European stock index derivatives came in February, when Dow Jones, Deutsche Terminboerse (DTB), Swiss Exchange and Bourse de Paris (SBF) officials announced the formation of Stoxx Ltd. The company rolled out four major stock indexes and a family of 19 industry sector indexes for the Euro and pan-European indexes. With the launch of Stoxx Ltd., the company attracted a dozen major investment banks to become licensees. Depending on the number of indexes purchased and the duration of the contract, license fees cost between 10,000 ECU and 400,000 ECU (89,174-$366,972). Most already have packaged some form of the indexes and are offering them to clients and investors as OTC or exchange-traded warrants.
Stephen Grossman, director of risk management at SBC Warburg Dillon Reed in London, says his firm already has tailored two warrants on the Stoxx 50 for German and Swiss clients by denominating the two contracts in D-marks and Swiss francs. SBC also introduced a Performance Linked to Equities Security (Perels), a security featuring a one-to-one correlation with the index with a discount for dividends. All three products are attracting institutional as well as retail interest, Grossman says.
"We're going to see clients tending toward [indexes] rather than doing their own basket trades," Grossman says. "Now we've got [indexes] that fit into the [trading] range they might be looking for."
Other licensees, such as Deutsche Bank, launched a similar warrant on the Euro Stoxx 50 index denominated in ECUs, the monetary predecessor to the Euro. Banque Nationale de Paris also is offering warrants on the Euro Stoxx 50 index on the SBF in French francs and ECUs.
The success or failure of licensee-developed products will serve as a barometer for the Eurex and Matif exchanges. Early success may. help determine the timing of the launch of exchange-traded futures and options contracts on Stoxx. Stoxx officials, who also work for their respective exchanges, say the Stoxx 50 index futures and options contracts may be launched this summer.
There is some concern such contracts will steal volume from existing indexes, which have grown dramatically over the past several years (see "Index fever," page 84). But Stoxx officials don't see the threat.
"I've heard these indexes will put national indexes at risk, but I don't think so," says Jacques Werren, deputy managing director of Matif. …