Scot Warren is the managing director of equity index products at CME Group. After the successful launch of a new joint venture with the Dow Jones Index Business and the recently announced licensing agreement with the Chicago Board Options Exchange (CBOE) to launch volatility products, Warren sat down with MarketsWiki’s Jessica Titlebaum to discuss what’s driving their initiatives in the equity index space.
Q. What does it mean to say one of your responsibilities is to globalize the equity index products?
A: It is about making it relevant. One of the highest-level strategies we have in the equity index complex is to allow someone to replicate a global equity portfolio. You need benchmark products for each major country and exposure so any asset manager can go out and replicate any underlying portfolio. We need to make sure we have products that do that.
Part of the globalization is to make sure we have access to those products that cover the globe which is why the cross-listing agreement with the National Stock Exchange (NSE) is important so we can provide our customers with access to the leading Indian benchmark index. We also have order routing agreements with Brazil and Mexico.
A: One of the main reasons is that we believe in the long-term trend of passive investment. We are seeing an increased global demand for index products and services, particularly outside the U.S.
This type of investment strategy requires a benchmark service, so we believe there is going to be an increase in demand for indices, not only in equity products but also across the entire gamut of asset classes.
Q. What role did you play in the acquisition?
A: I was the business leader of the Dow Jones acquisition.
Q. Did you have this index strategy before you found out Dow Jones’ business was up for sale?
A: This is a growth opportunity for us. Overall, indexation is an attractive business trend in the marketplace that opens up a range of opportunities for us. Partnering together is a logical extension of our existing strong relationship that allows us to expand our overall business, building on our expertise in index services, building financial markets and serving a global customer base.
A lot of people are talking about if we did this to protect our contract (e-Mini DJIA), but we wouldn’t spend this kind of money on a defensive strategy. We are really in this for a long-term growth story.
Q. How many indexes does Dow Jones have?
A: They have 130,000. Of these, 3000 are real-time products. The bulk of activity is around the Dow Jones Industrial Average and the Commodity Average. hey also have successful sector products as well as the Islamic Market family of products.
The liquidity we can build in a listed derivatives product will allow licenses to be sold, so it completes the circle. From our perspective we can leverage what we were able to create in liquidity here and extend it through licensing and other forms.
Q. You mentioned the Islamic market family of products?
A: The Islamic Markets is a family of indexes,and being able to expand distribution with intermediaries is a really important opportunity for us. It’s again another way to put index products in different forms.
The Muslim markets are grounded in Islamic Law (also known as Sharia). Dow Jones offers a family of products, which are compliant under Sharia. You can make an index Sharia compliant, but futures themselves are not. The forward interest component of futures contracts are, by definition, not a permissible activity. It doesn’t fit into that method of investing so this is a way to work with the sensitivities and the needs of the client base.
A: Our research team and the CBOE research team looked at data to see what products had a robust volatility curve to apply the index methodology. The energy products and the agriculture products worked.
There are other products like where we have a very big options surface but the volatility is so low that you need more volatility in the underlying product to be really interesting to the client base. It’s sort of a combination of depth of book and client demand.
Q. It seems like you are very passionate about this and that you like this area of business a lot, what do you like about it?
A: It’s a constantly changing landscape and we’ve got a successful franchise. We have a new (CME Group Index Services) service that is very complementary and to be able to leverage the collective strengths of the two businesses in a new and innovative ways. There is just a lot of opportunity. It leverages our alliance in venture management and market data business.
Overall, it’s fun, it’s challenging and you get to work with some really outstanding people.