On Sep. 21 Qontigo adopted the new Industry Classification Benchmark (ICB) on STOXX indices. We reported on the key changes brought about by the sectorial reclassification in a post at the time.1
At Eurex, futures and options contracts were introduced that day on the four new Supersectors indices within the EURO STOXX® and STOXX® Europe 600 indices:
- Energy
- Consumer Products & Services
- Food, Beverage & Tobacco
- Personal Care, Drug & Grocery Stores
Existing derivatives covering the legacy Supersector indices of Oil & Gas, Food & Beverage and Personal & Household Goods Supersector remain listed.
We caught up with Stephan Flaegel, global head of indices and benchmarks at Qontigo, and Randolf Roth, responsible for equity and index derivatives and client services at Eurex, to see how the transition from the old to new ICB classifications has evolved. Stephan and Randolf are members of their companies’ boards. This is a follow-up from a conversation on the topic we had last September with other members of the Qontigo and Eurex product teams.
Stephan Flaegel
Stephan, how have the ICB changes impacted STOXX indices and their portfolio construction?
“First of all, the new sectorial classification better reflects the modern economy so in that sense we welcome the changes. They will help portfolios be more in tune with current industry characteristics.
“With regards to the practical impact on indices, we introduced in total 616 new indices and changed 3,388. But the focus is placed on a much smaller number, which are the Supersector indices that record ample trading in the derivatives market. These were the ones that would require the most attention from us and from end users. Here, a recent whitepaper from our research team at Qontigo shows that, overall, the impact on headline portfolio risk and construction has been fairly limited.
“We committed early on that legacy Supersector indices within the EURO STOXX Index and STOXX Europe 600 Index will continue to be calculated to facilitate the transition to the new classification. These six indices will keep the current names, identifiers and time series but will be recreated by means of categories from the new ICB classification. Legacy and new Supersector indices will co-exist.”
How do the changes impact a narrower, blue-chip benchmark like the EURO STOXX 50 Index?
“The EURO STOXX 50 doesn’t have separate Supersector sub-indices, but its selection methodology will be rebalanced using now the new 20 Supersectors instead of the old 19 Supersectors. And some EURO STOXX 50 sub-benchmarks that exclude a certain Industry or Supersector are impacted. For example, the EURO STOXX 50 ex-Financials Industry will look different as the Real Estate Supersector has moved out of Financials.”
What feedback have you received from index clients? Has there been a switch to the new Supersector indices or will it be more of a gradual transition?
“The feedback from clients has been very positive as we provide them time to transition to the new ICB framework. ETF providers have time to consult clients and complete their due diligence before switching to the new indices, and structured-products issuers can keep their products alive until expiry as the legacy indices remain available. Any such transition takes time as users must comply with internal processes. So the speed of adoption has varied and is likely to be gradual and constant.”
How long will you continue to calculate the legacy Supersector indices for?
“We want to give every client the time and support they need for this transition. Our priority is that every stakeholder is ready before the legacy indices eventually get decommissioned.”
Randolf Roth
Randolf, we are days away from the December expiration for derivatives. How have volumes and open interest in products on STOXX Supersector indices behaved?
“With the implementation of the new ICB framework, new indices were launched by Qontigo and Eurex introduced futures on these new indices.2 Competitive quotes were available from the start. Since the introduction of the liquidity provider scheme in October, we saw that prices tightened within the required ranges for Sector Index Futures. Since then, the number of market makers in the order book has increased. This makes it easier for investors to gain or switch exposure to the new sectors. And our futures on the four new Supersector indices within the EURO STOXX and STOXX Europe 600 — Energy; Consumer Products & Services; Food, Beverage & Tobacco; and Personal Care, Drug & Grocery Stores — ensure there is enough choice to do so. Will the market adopt the new indices? I think we will be wiser about this after the December and March rolls as they will serve as important indicators.”
Do you already see a trend and if so, do you think it will continue?
“It is definitely too early to speak of trends. As always, in the end it is market demand that decides which contracts become successful. It will be particularly interesting to observe if investors in the STOXX Europe 600 Oil and Gas sector futures will switch to the new STOXX Europe 600 Energy futures during the next rolls, as it is one of our most popular sector contracts.”
Eurex plans to review the listing of ICB legacy sector derivatives by mid-next year based on market demand. What happens in the meantime?
“We will continue trading futures on legacy indices along with the new futures. That was always the plan and we haven’t changed that.”
The EURO STOXX 50 Index and the STOXX Europe 600 Index underlie some of the most liquid and popular contracts at Eurex. Has there been any impact on these?
“There have been some changes in the components due to the rebalancing; that is quite normal. But not to the extent that they would have substantially influenced the demand in trading of these instruments. Key macro events such as the US elections and the progress of COVID-19 vaccines had much more impact on recent volumes.”
| Find out more ● Dedicated ICB changes section on Qontigo’s website ● STOXX rulebooks ● Eurex circular |
1 For a description of all changes in the new classification, please see a research paper from FTSE Russell here.
2 There are also options on the new Supersector indices listed on Eurex.