In February we have launched the first index futures on a number environmental, social and governance (ESG) versions of selected benchmark indices from STOXX®. These indexes utilize several methodologies to achieve the desired result, from exclusions to weighting considering the carbon and climate impact footprint of the companies that are part of the index constituents. The growth of ESG investing has created demand for sophisticated or diversified index concepts that move away from existing benchmarks and derivatives to versions that reflect these sustainability factors. But how is the trend in other markets, what opportunities exist in the U.S. for example? And how does the currently achieved CTFC approval support us?
We asked Vassilis Vergotis, Head of Strategy and Product Design for Equity and Index at Eurex.
Vassilis, what exactly is a CTFC approval and what do we need it for?
For products that we offer in the U.S. for direct market access via our terminals, we need to engage CFTC, the U.S. regulator, and ask for the appropriate permissions. An approval is granted if the product that we intend to offer meets certain pre-defined criteria. Especially in the case of index futures what is of interest is the number of constituents, the relevant weightings, index concentration in the top constituents, etc. With these parameters the regulator is trying to ensure that the underlying index cannot be easily manipulated.
We work together with our colleagues from legal in the U.S. in every such effort that involves a regulatory approval of a product.
A regulatory permission opens the U.S. market – both buy side and sell side – to us, allowing our new ESG derivatives to be utilized from U.S.-based investors that apply ESG criteria to their portfolios.
You have just recently participated in a panel at FIA Boca. How strong was the interest in sustainable investing?
The panel we had at the FIA conference in Boca Raton was specifically discussing global trends in sustainable investing. Apart from other exchanges and market participants, the panel had one CFTC commissioner who openly asked the question to us and the audience about what the agency should do to help shape the industry and further facilitate any emerging or further developed trend in ESG investing. Both the panel and the audience were very interested to hear about the initiatives in Europe and the involvement of the European Commission in the space.
Is there also the trend to sustainable investments in the U.S.?
It seems like the topic of ESG investing is increasingly emerging in the U.S. with focus in some cases on areas that do not always apply in Europe like GMO and others.
As the discussion in the U.S. is gaining momentum, we will definitely keep an eye on any further developments.
Are there similar products in the U.S.?
Although U.S.-based MSCI is a major index provider in the ESG space, at the moment there are only ETFs as investment vehicles that go into the direction of sustainable investing. We are the first exchange to consider sustainability criteria for derivatives products.
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