The Chicago Board Options Exchange (CBOE) has unveiled plans to list options on the FTSE 100 and FTSE China 50 indexes beginning next week on March 29, 2016, aimed at US investors seeking exposure to "the largest and most liquid segments" of the UK and Chinese equity markets.
The aim of the launch is to continue offering opportunities to express views, manage risks and enhance yields with cash settlement options on two major indexes, according to Richard Rosenthal (pictured), director, business development FTSE Russell Index for CBOE. "The objective is provide instruments on the UK and China markets and to hedge positions/products," said Rosenthal. "The products are targeted to all market participants, including institutional, professional and retail investors. We expect the options will get traction among a variety of investors and product providers."
According to Rosenthal, CBOE has already created a number of strategy-based indexes such as the CBOE S&P 500 BuyWrite Index (SPX) which has been used by Invesco PowerShares (PBP) for an ETF and Barclays iPath for an exchange-traded note - ETN (BWV), and the expectation for the new options is that product providers can also use them to develop their index-linked investment products. SRP data shows that the CBOE S&P500 BuyWrite was used across 15 products in the US market between 2014 and 2007; while the CBOE Volatility Index (VIX) has been deployed in 575 products across jurisdictions of which 490 are still live products.
"One interesting angle of this launch is that for those who are focusing on looking at volatility, these instruments will also provide an opportunity for market participants to trade one vol against another," said Rosenthal.
The FTSE 100 Index is commonly used as a performance measure by index-tracking funds and derivatives, and the FTSE China 50 Index was designed specifically for international investors seeking to gain exposure to Chinese equity markets, according to Rosenthal. "The FTSE China 50 is the most accessible index comprising blue chip stocks traded in Hong Kong," said Rosenthal. "We think it is the easiest way for international and offshore investors to get exposure to Chinese markets. You have seven different classes of Chinese stocks (A-shares which are only traded in China's stock exchanges) but the stocks comprising the FTSE China 50 are unrestricted. The FTSE100 is also an obvious choice. This is the third largest equity market cap index in the world, and provides access to the 100 largest, most liquid stocks listed on the London Stock Exchange (LSE)."
According to Rosenthal, the FTSE Russell indexes are among the largest and most widely used by US investors with US exchange-traded funds (ETFs) tracking FTSE Russell indexes comprising some of the most actively traded ETFs globally. "The options will be based on mini versions of the FTSE 100 Index, and the FTSE China 50 Index," said Rosenthal. "Building the options on a mini version of the indexes means that the option is based on one tenth of the FTSE 100 and the notional value which will be expressed in US dollars will be 100 times the mini index, which is approximately 600, or US$60,000."
There are over 8,000 live structured products linked to FTSE indices, according to SRP data, including 5,057 products featuring the FTSE100 of which 331 were marketed in the US, and 556 linked to the FTSE China 50 index, four of which were sold in the US. Russell indices have not had as much traction among structured products providers, but has more than 6,000 products marketed in the US market, of which 3,945 are still live including two products linked to the Russell1000, three to the Russell1000 Value, and one to the Russell1000 Growth.
The listing of FTSE 100 and FTSE China 50 index options are part of a licensing agreement forged by CBOE and London Stock Exchange Group (LSEG) in February 2015. The deal made CBOE the exclusive US provider of options on more than two dozen LSEG-owned FTSE Russell indexes, and also provided for the two companies to collaborate on the development of additional index options products and investor education globally.
Under the agreement, CBOE on April 1, 2015, became the exclusive US home for options on the Russell 2000 Index, the widely followed measure of the US small-cap market. On October 20, 2015, CBOE launched options on three Russell large-cap indexes: the Russell 1000 Index, the Russell 1000 Value Index and the Russell 1000 Growth Index. Also in April 2015, CBOE launched options on the MSCI Emerging Markets and MSCI EAFE Indexes following an agreement with MSCI.
FTSE Russell has entered into an agreement with CME Group through which it will have exclusivity to develop other derivative products in the US market, including the FTSE China 50 futures which are already trading at the commodities exchange.
Rosenthal said CBOE will continue to look at any opportunities to develop other instruments such as swaps and OTC-cleared products on FTSE Russell indexes, as well as options on other FTSE Russell indexes.
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