Mid-Atlantic mind set
With the UK’s benchmark index, the FTSE 100, hitting highs not seen for a year what about the company behind the index, London-based FTSE Group? The company was formed in 1995 and is a joint venture between the Financial Times and the London Stock Exchange.
The company’s chief executive is Mark Makepeace. In a recent interview he discussed customised indices, the new European index series – and the fact that the future lies across the Atlantic.
Makepeace says there is a huge amount of interest in the area. “Where we’re seeing a lot of growth is the customised versions,” he says. “What clients want from us is much more customisation. That’s where our clients want us to go. Our client base for that is very much an institutional client base, pension funds across the world. And they want a tailored service.”
The thing about customisation, he says, is that it has to start somewhere, from a strong base. “They all start from the standard benchmark.”
Using the standard benchmark as a starting-point, clients can then add the details they want. “These things can now be done, and because they can be done – and can be done at reasonable costs – then these people are becoming more and more demanding.”
The problem for FTSE is that the customised index market is not as profitable. “It’s not as high margin as you imagine. You’re designing something that is individual to each client. The business is fiercely competitive.”
And what of the current talk of the so-called unconstrained benchmark? “It’s just that they’ve got a choice now, they can define their own benchmark. What you’ve got to think is ‘where do they start from?’”
A house is only as good as its foundations, he says. “If you build your house on sand it’s going to fall down.” He says FTSE indices provide the coverage, completeness and liquidity screens that are needed to be the base for an “unconstrained” benchmark.
As for the index market itself, Makepeace is bullish. “It’s one of the few markets that’s growing, still growing strongly.”
He explains that it’s perhaps misleading to think of just one index marketplace. “The index market is not a single market,” he says. “There’s the broad benchmark area, where the main growth there is in the global benchmark. And then there’s the trading area, which is much more open.”
“People are trying to combine both,” he observes. “Creating derivatives has a marginal cost. Benchmarking is an ongoing business.” He says the derivatives side of the business is more demanding.
FTSE has recently entered the European index market in a big way, with the launch of the FTSEurofirst series with Euronext. The move pitted it against the market incumbent, Dow Jones Stoxx and its partner Eurex.
“It’s had a tremendous start,” Makepeace says of the new series. “When we started out with Euronext on this project we knew we had an enormous challenge. Stoxx was entrenched, with high trading volumes.
“Our first goal was to make sure we had the liquidity in those contracts and I think we’ve achieved that.” He says the FTSEurofirst 100 is now beginning to trade more than the Stoxx 50.
But he stresses it’s early days for the newcomer. “We’re getting liquidity in the two contracts – now we’ve got to do is get more users.” He says volumes are regularly around 5,000 a day. “We’re ahead of our targets, it’s now about the products which are launched on the indices, its now about getting the fund management community using them as their preferred hedging tool.” He adds that a Swiss fund – whose name he couldn’t disclose – has recently taken FTSEurofirst as its benchmark.
“Some big players are putting their toe in the water, but it’s too early to say we’ve succeeded.”
Makepeace sees FTSE’s entry onto Stoxx’s turf as a good thing for users. “There’s lot of benefits in having more than player. Choice in the market is a good thing, having one player is not a good thing.”
And he expects the competition to respond. “I think you’ll see a reaction from Stoxx and Eurex.” He sees much more competition in the market. But it’s not a zero-sum game. “I don’t think one player will win and one player will lose.”
With its strong position in the UK and its new toehold in Europe, Makepeace is turning FTSE’s attention across the Atlantic. “The US – that’s our challenge. It’s the biggest market in the world. Our strategy is like we have elsewhere, it’s not to go it alone but to build strong relationships with local players. That’s the way we’ve had success elsewhere in the world.”
He says he and his op-managers now spend one week a month in the US. “I think for FTSE to be truly global the mindset of the company needs to exist somewhere over the Atlantic,” he says. “You can’t be just European, you can’t be just American. We’re trying our hardest to be global.”
FTSE has offices in New York and San Francisco and a total US-based staff of 13. He aims to make the US account for half of FTSE’s revenues, up from its current 17% share.