By Sarah Rudolph
NYSE Liffe U.S. announced today that it will become the only U.S. exchange trading MSCI-based futures contracts starting no later than June 2011. MSCI will not be renewing its licensing agreements with the Chicago Mercantile Exchange to create futures contracts on the MSCI EAFE and MSCI Emerging Markets Indices.
We spoke with Marco Bianchi, head of business development for NYSE Liffe U.S., who said that when NYSE Liffe signed the license agreement with MSCI last year the exchange knew there would be a period when some of the products would still be trading on the CME as a result of a legacy license. NYSE went live in September 2009 in order to prepare for the launch of the exclusive contracts they are developing now.
“We were able to demonstrate [back in Sept. 2009] that we can offer all this to clients ahead of time, and that they can have the confidence in the market to extend their business to us,” Bianchi said.
“Our approach goes above and beyond the products that traded on the CME. We have licensed a total of 41 different indices from MSCI, in Emerging Markets and EAFE indexes in the USA, Europe and BRIC. Within those benchmarks we have different styles—growth and value – and sectors.”
In international investing, the MSCI is the benchmark for tracking a portfolio, Bianchi said. But sufficient liquidity has not yet developed to graduate to the next level.
“That’s what we’re doing – bringing in new products and new market makers to inject more liquidity. And going beyond the Chicago trading community.”
There are a couple of similarities to the story of the Russell index-based contracts’ move to being exclusively traded on ICE, Bianchi said, but differences as well. “Some argue that ICE graduated beyond being just an energy platform when they got the exclusive license for the Russell index products. But the Russell is only one products and it is domestically focused. Here we are taking a couple of Chicago-based products and building a much broader (and international) set of products.”
NYSE Liffe U.S. is planning to go live with some of the Euro-denominated products this September.
The products clear at the Options Clearing Corporation, where NYSE Amex and Arca options also clear. The exchange also trades MSCI ETFs on NYSE Arca.
“We can engage existing clients trading similar exposures and offer them futures as part of portfolio of projects to track these exposures,” Bianchi said.
NYSE Liffe U.S. also offers a futures incentive program that gives a rebate to all clients in active MSCI –based ETFs on Arca. When using them to hedge or spread exposure, clients get a rebate on the futures transaction.
In addition to supplementing the liquidity with market makers, NYSE Liffe has also brought in a new set of “depth market makers” who focus on market depth as opposed to top of the book, in a response to the needs of institutional clients.
The MSCI indices have benefitted from the “healthy competition” between the CME and NYSE Liffe, he added. Before NYSE listed the products, CME traded “a couple of thousand” contracts a day; now the market in the EM and EAFE alone is about 10,000 contracts a day, he said.
“People are looking at investing globally more and more these days.”
The products work on a quarterly expiration cycle. Currently, NYSE Liffe is talking to clients about working through the next couple of quarterly rolls.
The exchange already has about 25 – 30 percent of the average daily volume in these products. “We’ve already been through a number of quarterly expirations, proving we can track the markets successfully,” Bianchi said.
He is confident the transition of open interest from the CME to NYSE Liffe U.S. will run smoothly.
“The Russell index products, for example, had about 300,000 lots of open interest to move from the CME to ICE. We have about 60,000. We want to move quickly; we think we can gain momentum from [the first] couple of rolls and build from there. The market is live and trading as we speak…we are trading about 1500-2000 contracts a day.
“We will migrate the contracts and build from there,” Bianchi said.