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Russell Suite Competition Ambiguity Raises Some Questions

Exclusive. Non-exclusive. Exclusive. CME. ICE. CME again.

The story of the Russell Index futures complex licensing over the years is a study in ambiguity, changing strategies and partners.

We know the  will win this round as they currently hold the long term license for the products. But what will happen in the short term is ambiguous as these two global exchange giants square off and try to maintain control or pry loose the open interest in the Russell futures products.

After ICE took over an exclusive Russell indexes licensing agreement from CME in 2007, CME returned the favor by recently re-securing the exclusive licensing agreement with FTSE Russell to trade the products starting on July 10. Back in 2007, ICE used the deal to help in its bid to buy the Chicago Board of Trade out from under the CME. ICE did not win the CBOT, but it had a 10-year run with Russell as the only venue to trade its futures and options on futures contracts.

Now a decade later, CME is reunited with FTSE Russell but is tangled in a limited-term competitive duel with ICE. Trading has begun at the CME but it is concurrently trading on ICE potentially through June of 2018 as well – the same product, different exchanges, different clearinghouses and the same owner of the intellectual property.

Since CME has the new long-term contract with FTSE Russell, we know how this competition ends. But between now and year-end when the CME is truly the exclusive venue, there is a question about how we are going to get there. Is what is good for ICE good for customers? Is what is good for CME good for customers? Does FTSE Russell, the owner of the intellectual property licensed to each have a view on how it would like the transition of its products to occur?

The competition pits the short-term interests of the exchanges against the long-term outlook of customers and Russell itself.

I thought it would be good for the market for each party to clearly state its aims and goals for the products. In an email I asked each party to respond to the question of what their goals for the product, short term and long term. I asked FTSE Russell what they would like to see occur in this transition to maximize the value of the indexes to your clients and yourself?

ICE responded by pointing me to a June 30, 2017 press release that outlined what what products would continue to trade through the June 2018 cycle, what were delisted and that after July 3, 2017 they would not list any more Russell contracts.

CME responded with the following statement:

We’ve been very pleased to bring Russell 2000® index futures back exclusively to CME Group, where traders can now access several major equity indices on a single platform.  CME’s exclusive rights to list, trade and clear Russell futures began July 1.  As is customary, to facilitate the transition of customers’ open positions, there is a closing period at ICE that could potentially last up to one year if open interest remains in contracts there.  We’re already seeing customers choose to establish open interest in the Russell 1000- and 2000-related front month contracts at CME.   The E-mini Russell 2000 has had a very strong start here, with a 23K volume day just a week ago and a 21K volume day yesterday.  When customers migrate their Russell 2000 positions here they will instantaneously enjoy a more robust and cost-effective way to manage their global index exposure, with margin offsets of up to 75% against S&P 500, Nasdaq 100 and Dow Jones index futures.

FTSE Russell responded to my question with this:

FTSE Russell  has enjoyed a longstanding relationship with both CME and ICE.  With regard to our Russell 2000® Index, we can confirm that the exclusive license to list futures and options linked to this index moved back to CME effective July 1, 2017, subject to a wind down period for ICE to ensure a smooth transition for the market.  We look forward to our expanded partnership with CME that includes developing a wide range of equity index futures products in the United States over the next 10 years.

As we approach September, customers will start to make their intentions known. Currently there is little open interest in either exchange’s December contracts. CME had suggested one  strategy for moving open interest from ICE to CME is simply to put on a September/December spread opposite from what ever your position is at ICE. If you are long Sep at ICE, sell Sep at CME and buy December. When the September expires and settles to the same underlying cash index, you will be left with position in December.

Other contract competitions over the years have had a winner-take-all end result and this one will be no different while both parties have a licensing deal. Think about Eurex and Liffe competing over the Bund. The fight between CBOT and NYMEX over the metals was interrupted by the CME purchase of the CBOT, so that one was never fought to a conclusion. Other competitions, such as Eurex versus the CBOT for the bonds or Liffe and CME for the Eurodollars, saw some beachheads established but the wars lost.

Back when ICE licensed the contract, longtime Russell executive Kelly Haughton was at the helm of the Russell indexes. At one point, Haughton tried a non-exclusive license to spur competition among exchanges to see who would grow the Russell product the most. But then he and Russell shifted gears and gave ICE an exclusive contract.

Now FTSE Russell is owned by the London Stock Exchange Group and is part of a larger global organization with its own vested interest in exclusive deals, in my opinion.

Back in June, as CME was gearing up its July launch of the FTSE Russell products, open interest suddenly appeared in the mini Russell 2000 contracts across a couple of months – one-lots to be exact. According the CME Group website,  ICE was not allowed to list new Russell products after July 1, 2017.

Currently ICE has about 580,000 lots of the mid-cap benchmark equity index Mini Russell 2000 open, while the CME has 7700. CME traded over 21,000 contracts Tuesday, while ICE traded over 192,000.

No one is begrudging any of the parties for exercising their contractual rights or desire to make a profit from them. I am a believer in competition and in reaping the rewards from competing well.

However, these moves by market players have raised questions about the transition and some clarity from the participants would be helpful. I hope a reply is forthcoming to the questions posed.

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Lothian is executive chairman of John J. Lothian & Co. and editor of the John Lothian Newsletter. He publishes MarketsWiki.com, MarketsReformWiki.com, MarketsWikiEducation.com, JohnLothianNews.com and several industry newsletters.