FTSE launches FX-based indices

www.ftseglobalmarkets.com/media/k2/items/cache/e7607958b08def40d8433de6d91f7756_XL.jpg

The FTSE Cürex FX Index Series provides the next generation of FX valuation and performance benchmarking for global capital markets. By establishing real-time Bid and Offer spot FX indices on 192 currency pairs (FTSE Cürex FIX), from multiple independent contributors and at multiple depths of liquidity, global capital markets benefit from improved clarity when viewing previously opaque foreign exchange pricing. Mark Makepeace, chief executive of FTSE Group, explains that, “FX is the world’s largest capital market and currency exposure affects investors in all asset classes. This new series of FX indices will be used by our clients world-wide as a better benchmark for managing currency risk and performance, and will support a wide range of passively managed FX currency funds and strategies.” FTSE Global Markets spoke to Jonathan Horton, president, FTSE North America and Bill Dale, chairman & chief executive officer of New York-based Cürex Group about the salient features of the initiative.

FTSE GM: What is the value of the FTSE Cürex FX Index Series? Why is the index series innovative?

JONATHAN HORTON, PRESIDENT, FTSE NORTH AMERICA: The indices include a number of features which, in combination, offer a highly differentiated value proposition: Price discovery for the indices occurs in the institutional FX markets using multi-contributor price inputs from many of the world’s largest FX liquidity providers. By linking institutional FX liquidity directly to our independent indices, we enable execution at a benchmark rate, where every trade is a time-stamped print on the index—effectively a 24/5 real-time FIX. As is standard practice for FTSE, the indices are calculated and managed according to a transparent and publically available rule set, and audited electronically to ensure data quality—this is in contrast to many other FX benchmarks in the market. In turn, this transparency, ­independence and executability creates unprecedented opportunities for both the buy and sells sides, who seek to grow FX as an asset class, expand investor access and develop the next generation of currency investment products.

FTSE GM: What are the main indices in the index series and what products might be created from them?

BILL DALE, CHAIRMAN & CEO, CÜREX GROUP: We are calculating and publishing executable bid and offer indices for 192 currency pairs (FTSE Cürex FIX) and 8 benchmark baskets on a real-time basis, 24 hours a day, 5 days a week. Additionally, every 15 minutes a ‘snap’ index is published to provide a time-stamped valuation metric for NAV calculations, product valuation and client reporting. Once a day we also publish DANI—Daily Accrued Net Interest—which is equivalent to an overnight rate.

We look at the benchmark pairs as building blocks for the creation of a wide range of OTC and on-exchange products and we are actively in ­conversation with a number of providers who wish to create new products which will enable investors to gain exposure, or manage currency risk in new and improved ways. Importantly, whatever the structure, FTSE Cürex FX Indexes are designed to be flexible and inclusive, providing an independent, rules based and consistent valuation input to calculate NAV, or benchmark performance in a wide range of products.

FTSE GM: Who is FTSE Cürex FX Index Series designed for?

BILL DALE: The index series is designed to be an inclusive platform, accommodating a broad array of ­institutional foreign exchange ­requirements. The index series can be used by asset owners and plan sponsors who seek to gain efficient exposure to global currency markets and new sources of uncorrelated beta. The indices can also be used for benchmarking the performance of active currency strategies and as an independent auditable, pricing input for analytics and risk management. Asset managers can use the indices as an independent currency price input for purposes of NAV ­calculation, client reporting, risk management and analytics. Additionally, managers can leverage the FTSE Cürex Benchmark FX Pairs as fuel for the creation of new currency investment and overlay products. Meantime, sell side organisations and product issuers seeking to grow FX as an asset class can use the indices as an independent price input for the creation and valuation of the next ­generation of innovative FX investment, hedging, risk management and currency overlay products, and as an input for client reporting and best execution analysis.

FTSE GM: How can investors use it to enhance their approaches to FX risk management and FX overlay products?

BILL DALE: Using the currency pairs as building blocks, we are now able to offer the market executable FX indices linked to the FX exposure in third-party products which enables that risk to be monitored and managed dynamically—so for example, we can create an index which exactly mirrors the FX exposure of the FTSE All-World Index so that that currency exposure can be separated from the equity exposure. That risk can then be separately managed in accordance with the specific goals of the investor.

FTSE GM: Which currencies are included?

JONATHAN HORTON: At launch we are providing executable benchmarks for 192 different currency pairs based on 24 developed and emerging market currencies (AUD, CAD, CHF, CNH, CZK, DKK, EUR, GBP, HKD, HUF, ILS, JPY, MXN, NOK, NZD, PLN, RON, RUB, SEK, SGD, THB, TRY, USD, ZAR). We will be expanding coverage to other currencies over time. For each currency we publish a spot, spot-next, tom-next and total return index.

FTSE GM: Can you please explain the operation of the Benchmark Basket Index Series? Which currency baskets are included and how are baskets weighted?

BILL DALE: We have launched with eight initial currency baskets which are designed to measure the value of the USD against different combinations of currencies—G7, G8, G20 and Emerging Markets. The baskets are equally weighted and rebalanced on a weekly basis to ensure a consistent exposure. The flagship USD/G8 basket tracks the value of the dollar against currencies key to global finance, trade and commodity production, and also the Chinese renminbi (RMB), Asia’s most important emerging reserve currency. This unique combination provides ­differentiated information for investors seeking to express ‘risk on, risk off’ trades and also provides a representative benchmark for active currency strategies.

JONATHAN HORTON: To add to Bill’s point, the index series is designed to be flexible and to evolve. Leveraging FTSE’s successful custom index services, investors can create custom currency baskets using any combination of pairs to suit their individual investment.

FTSE GM: Why does the world need a new USD Index?

JONATHAN HORTON: There is a need for a new USD index as China begins to emerge as a significant global trading counterparty and the RMB becomes more prominent in global commerce. Currently there are no major USD indices which incorporate this important currency and the FTSE Cürex USD G8 Index provides a more even measure to capture and assess the movement of the USD relative to the rest of the world. Through the inclusion of RMB, the index captures over 90% of the USA’s international trading ­relationships, creating a more representative benchmark for the valuation of the US Dollar. Established dollar benchmarks were created long ago for very different purposes than they way they are used today and are commonly overweight certain currencies, underweight commodity-centric currencies and have not kept pace with changing FX markets as developed countries with high debt levels devalue their currencies.

FTSE GM: Why was the index series launched at this time?

JONATHAN HORTON: Traditionally, currency has been viewed by investors as a risk that they are exposed to as a result of global allocations to other asset classes like equities. With heightened consciousness of the impact of currency risk on portfolios, there was a clear demand for services which enabled that residual risk to be managed in a smarter, more efficient and more transparent way. Secondly, as main asset classes become increasingly correlated, many organisations are looking at how currency allocations can diversify their portfolio and augment performance—we wanted to provide solutions for these groups which enable them to gain exposure and access these benefits more easily via transparent, rules-based an independently calculated products.

FTSE GM: Why did Cürex and FTSE Group start working together?

BILL DALE: FTSE was a natural choice for us to partner with in the creation of these new currency indices—they have tremendous brand with investors around the world and are well known for providing both high-quality robust solutions and leadership in the development of new concepts and approaches to indexation.

JONATHAN HORTON: The partnership is a strong combination of complementary skill sets and expertise—Cürex has tremendous experience in FX—their senior team comprises former chief dealers, ECN technology specialists, fiduciaries and former governmental advisors, so they are in an excellent position to understand the challenges facing FX market participants and provide smart solutions. FTSE’s deep expertise in index creation, distribution and governance, coupled with our relationships with asset owners and asset managers gives us insight into the needs of buy-side which have enabled us to develop an index series which meets their requirements, whilst being flexible enough to evolve with the market.