Scot Warren is senior managing director of equity index products and services at CME Group, a position he has held since February 2010. He is responsible for leading the company’s equity and equity index product lines, including new product launches such as the U.S. dollar-denominated Ibovespa futures contract, which is set to launch Oct. 22, 2012. Warren spoke with John Lothian News Editor-at-Large Doug Ashburn about the new Ibovespa contract, how it differs from the existing Brazilian real-based Ibovespa that trades at BM&FBOVESPA (“BVMF”), and how this product launch fits with current trends in market participation, capital and regulation, and how it fits with CME Group’s global strategy.
Q: What is the new Ibovespa contract, and how does it differ from the Ibovespa index futures contract traded in Brazil?
A: This is a U.S. dollar-denominated version of the Ibovespa contract that trades on BVMF, which is a total return index and reflects the Brazilian market. We have had a multi-year partnership with BVMF, where we had mutual investments in each other’s firm, and we are trying to find ways to take down barriers to participation and bring incremental participants into the market. So when we look at U.S. investors trying to access Brazil, there are offshore registration requirements and demand for localized clearing and execution capabilities that present barriers to entry. For U.S. asset managers and hedge funds that want to transact business in Brazil, but maybe have a relatively modest amount to invest, it was a lot of work to access that market.
Having Ibovespa on a U.S. platform, which will clear trades in the U.S. and settle in dollars, removes many of those barriers to participation. We think this is a way to incrementally grow the market.
Q: Where and when will the index be traded?
A: It is a Globex-only product. It will not be like our other Globex products, however, because we will follow the underlying trading hours in Brazilian markets. When Brazil is open, we are open, as opposed to a 23 ½-hour Globex trading day. The concept is to provide access to Brazilian products in localized time, but on a U.S. platform.
For the derivatives to be successful, the underlying cash market needs to be open, so we felt it was more important for us to concentrate our efforts to build liquidity during those times. We are working with the participants to take down the barriers to access, and they are not really saying they need 23 ½-hour access; they mainly need it during normal trading day hours. We can envision that, when liquidity builds, demand for other hours of exposure could be there, but the first thing we are trying to solve is access during the trading day.
Q: How does the launch tie in with the larger issues of market access, participation, and global trends in regulation and capital flow?
A: If you look at the Brazilian equity market, about two-thirds of the notional value of equities trade as ADRs in the U.S. Also we are seeing a substantial level of offshore interest in the Brazilian market, and this is another way for customers and market participants to gain access.
On Oct. 1, BVMF launched its S&P 500 contract, which is cash settled in Brazilian real. On Friday – about two weeks after the launch – the contract traded over 1800 contracts, and has open interest over 1100. So, again, it is about barriers to market participation. There were limits on Brazilian citizens’ ability to invest offshore, with tax and margin consequences to offshore investing. To grow interest and trading activity in the S&P 500, it made sense to partner with BVMF to clear and settle it locally. Our efforts with Ibovespa are mirrored by the efforts of Brazil to support the S&P 500 and increase market participation there.
Q: How does this fit within CME Group’s overall strategy?
A: Our strategy is to have an index product portfolio in which people can replicate a global equity portfolio. We have U.S. large caps, we have Japanese exposure, we have Indian exposure, but not having other emerging market countries makes it difficult to satisfy investor demand. Demand is there for Brazil. Relative to other BRIC countries, Brazil has outperformed, so there is an increasing focus on Brazil as an investment opportunity.
It also goes back to the structural advantages of a futures product versus an ETF – it comes down to liquidity, transparency, ease of access, and tax efficiency. So it is really people’s preference for product wrapper as well as the underlying exposure.
We seek to make ourselves relevant to clients across segments and geographies. Expanding our product portfolios and capabilities are central to that. This puts another international benchmark on our platform. We are working with our partner to build participation in our core benchmark products.
The dollar-denominated Ibovespa futures product is another piece of our global strategy to serve investors across time zones, regions and products.