Portfolio managers who trade futures on the Russell 2000 small-cap index will have to contend with a unique transition challenge this northern summer when the popular contracts move to ICE Futures U.S. from the CME exchange.
Institutional investors, with an estimated $4 trillion benchmarked to Russell indexes, use the contract for pure hedging or to gain exposure. Never before has a major U.S. financial futures contract moved from the market where it was first listed to another. That shift raises several technical issues, from margin costs to clearing. But the Russell 2000 exchange move might prove that innovators, such as IntercontinentalExchange Inc., the Atlanta-based parent of ICE Futures, do not need to wait for cumbersome regulatory changes to throw the gauntlet at their competitors. “We compete head to head with Nymex (New York Mercantile Exchange) in oil and natural gas. We compete head to head with Euronext.liffe for sugar and coffee. This is one more example where ICE is competing with another exchange. As we compete, is there more innovation in the industry? Yes, and at an outstanding rate,” ICE Futures’ US President Tom Farley said in an interview.
Prior attempts by European exchanges to snatch a share of trading in Chicago flagship financial listings — such as the eurodollar or 10-year Treasury futures — failed because of the clearing and operational difficulties of closing a position on one venue and reopening it on another. This time, though, investors have no choice: Russell Investments, which designed the small-capitalisation equity index, has ended its agreement with the CME and gave ICE Futures rights to exclusively trade the contract by no later than September. Get used to volume “There may be some disruption around the date of the change, and maybe some afterwards, as ICE gets used to handling the volume,” said Greg Eisen, senior portfolio manager at ICM Asset Management in Spokane, Washington.
Some 60 million Russell 2000 contracts traded on the CME in 2007. “We have not really taken this into account as a factor in our strategy. It has not hit my radar yet. The September deadline gives people enough lead time to adjust. It’s good that it’s not in June, because Russell does its rebalancing at the end of June. That’s enough of a disruption right there, without throwing in any mechanical disruption,” added Eisen, whose firm and its affiliates have US$7.5 billion in assets under management. ICM alone manages US$426 million in index investments.