Made in Europe, and almost by Europeans, is one way to look at the development of the new set of euro-denominated real time fixed-income indices about to be launched by Deutsche Börse in Frankfurt, in conjunction with its partners ABN Amro, BNP Paribas, Deutsche, Dresdner and Morgan Stanley Dean Witter.These five are reckoned to be the heaviest hitters in market-making in euro fixed-income, handling some 80% of the dealing between them.
But the plan is to widen the range quickly to provide a global index family. First to be issued will be sterling bond indices. This will require widening the range of data providers worked with to include other contributors. Then sights are set on other currency products.
Under the banner of ‘Box – the first real-time index family’, the initial euro indices will use live feeds from the dealing operations of the five market-makers to calculate the prices. The first two to be launched during the summer will be the Box E sovereign, comprising all sovereign bonds denominated in euros, and Box E zone sovereign, made up of bonds issued by EMU states only. A number of sovereigns denominated in euros have been issued by governments not in EMU.
The minimum issue size for this sector will be E2bn, says the Börse, which decided to issue both maturity and overall indices for the three main markets, France, Germany and Italy, where there are sufficient issues to do the separation into the five different maturity buckets, but just overall indices for the remaining countries. The market coverage is to be 94% of all European government market bonds.
By the end of the year, if all goes according to plan – already the launch date has been moved on – is to have the other parts of the euro family all ready to be wheeled out to an expectant marketplace. The sub sovereign, the collateralised and corporate indices are scheduled for the third quarter. The first of these categories includes supranationals, where the market coverage is reckoned to be 49%, with agencies at 81% and sub-sovereigns at 33%. The collaterised will include the very active Jumbo Pfandebriefe sector, with a market coverage reckoned to be 79%.
The corporates will be indexed according to their ratings (Standard & Poor’s, Moody’s and Fitch IBCA are being used), though for the sector indices these will be limited to overall indices with the initial division being between non-financials (56% market coverage) and financials (33%). Ultimately, the aim is to have sub-index sectors, such as energy, pharmaceuticals, basic materials and so on, says the Börse.
From the investors’ point of view, the intention is to deliver a new fixed-income benchmark, with the performance indices, which include price and coupon payments, corresponding to total return indices; price indices are on a ‘clean price’ basis. The Börse says that the use of bid and offer prices coming from the market-makers, as well as the rules regarding liquidity and transparency mean that investors should not have difficulties should they want to replicate and track the index.
It also moots the possibility of exchange-traded derivatives somewhere down the line, without specifying anything definite. But once the Box family establishes itself as a stable and liquid underlying, then the conditions for derivatives to emerge should be right, but it is impossible to put a date on this until the underlying has established itself. It is likely that in the meantime the market making houses will be offering OTC derivative products, probably soon after launch.
The indices are calculated on volume weighted basis, with individual bonds being factored in in proportion to their share of the total outstanding volume.
The main indices will be available on the internet, free of charge, or by direct link to the Börse, as well as from the data vendors. Later two additional services will be introduced.The first will enable investors to click on and obtain real-time prices for individual bonds. The other will allow investors access end-of-day bond prices to revalue their portfolios. The prices will be the same as are used by the Börse in constructing the indices. So, if this daily valuation service is used, the investors will eliminate tracking errors.
The Deutsche Börse sees the euro indices as a big step for investors, providing a product right where it was required in the euro fixed-income marketplace. “These indices place a sophisticated instrument at the fingertips of investors, traders and risk controllers wanting to manage and monitor their investment operations in the euro fixed income markets.” But at the same time, this is just the first step in the very ambitious project of developing a range of other currency indices on the same real-time basis. IPE