FTSE Russell forges ahead

Patrick Fay, global head of derivatives at FTSE Russell, laid out the expansion plan for the newly combined index business following the acquisition of Frank Russell by the London Stock Exchange Group last year.

Fay said at a media briefing yesterday: “This is a new era for indexing. Russell mainly covered the US while FTSE was more successful in other markets.”

In June last year the London Stock Exchange Group announced the acquisition of Frank Russell from Northwestern Mutual for $2.7bn (£1.6bn). At the time the UK exchange said it would carry out a review of Russell’s investment management business to determine its positioning within the group but combine Russell’s index management unit with LSEG’s existing index unit, FTSE.

Len Brennan, president and chief executive of Russell, said in a statement at the time of the acquisition: “The combination of our index business with FTSE creates a truly global index leader, with a highly complementary fit of products and distribution capabilities and a unique position as a leader in major domestic market benchmarks as well as international equities.”

Today LSEG said in a statement that it had agreed to sell Russell Investments, with $266bn of assets, with JP Morgan and Goldman Sachs providing advice. Private equity firm TA Associates is buying the asset manager for gross proceeds of $1.15bn (£752m) in cash with Reverence Capital Partners making a significant minority investment.

The asset management sale is expected to close in the first half of next year. The exchange said this gives an implied multiple of about 18x current year EBITDA for the index operation and the separation of Russell Index business from Russell Investments is expected to be completed in the first quarter of next year. The Russell Index business will then be fully integrated with FTSE.

Fay said: “After the completion of the acquisition last year we engaged consultancy Tabb Group to carry out research on which three FTSE products would be most likely to succeed in the US.”

The research found that derivatives based on the FTSE Emerging Markets index, the FTSE China 50 and the FTSE 100, the UK benchmark, would be most popular in the US.

In August FTSE Russell and CME Group entered into a licensing agreement establishing the US derivatives exchange as a global partner for futures, options on futures and OTC cleared products on FTSE Russell.

Fay said that in October FTSE 100 futures in sterling and dollars and FTSE China 500 futures will begin trading on CME’s Globex system for 24 hours a day and start to be cleared in US.

“We know we need to have patience to grow contract volumes,” added Fay. “I would love to see these new contracts trading thousands of contracts a day in the future which is a possibility.”

FTSE Emerging Markets futures and FTSE Developed Europe futures are slated to start trading on CME in January 2016.

After futures have started trading on these indices in the US, option products will launch on the CBOE. In February CBOE announced it has entered into a licensing agreement to develop and list options based on more than two dozen FTSE and Russell indices.

In Europe Fay said a FTSE 100 volatility contract will be listed on ICE at some time and the firm is also investigating the possibility of a pan-European derivatives index.

“There is strong demand in Europe for a volatility contract,” continued Fay.

He worked at the CBOE when the options exchange launched the successful CBOE Volatility Index contract, or VIX, which has become known as the “fear gauge”.

FTSE Russell is also researching smart beta and index factor indexes, a growing area of the exchange-traded market.