Having established a wide-ranging service that spans its ICE Futures US and ICE Futures Europe venues, the exchange is looking to build on its historic core products with initiatives aimed at developing its growing equity index franchise.

Caterina Caramaschi, the London-based global head of equity derivatives at the Atlanta-based powerhouse, spoke to Global Investor about its plans for the coming year. In particular the firm is looking at developing the next generation of its ESG offering.

“In general, our job is to serve our clients and provide appropriate risk management tools, rather than tell people how to trade, so we are always thinking about what we need to add in terms of functionality, new products etc,” Caramaschi added. “We have been working closely with FTSE on their new ESG methodology, and the plan is to launch futures on FTSEs new ESG indices once they are live.”

FTSE equity index products are part of the European side of ICE’s franchise history though the way clients trade has shifted significantly over that period.

“The FTSE franchise has grown out of a strong 38-year relationship, going all the way back to the first FTSE 100 futures that we launched in May 1984,” Caramaschi said. “We offer futures and options on the FTSE 100 Index, FTSE 100 Dividend Index and FTSE 250 Index to name a few. Since mid-2021, we have been developing our FTSE 250 Index Futures and we have already started to see improvements in the screen prices and proportion of volume traded on screen.”

The push to increase adoption of those contracts have started to bear fruit, with 80% of FTSE 100 futures now being executing via central limit order book versus the block. Market volatility and the demand for more targeted exposure have meant increased flow in a wider universe of instruments.

“We continue to focus our efforts on building our FTSE 250 offering, because there is a belief from clients that the FTSE 250 Index acts as a more accurate barometer of the UK market, given its concentration of companies with locally generated revenues,” she added. “Our efforts are also focused on expanding our successful FTSE 100 derivatives offering with new products to be announced soon.

That thesis was tested after the interview was conducted, as the presentation of the new UK government’s growth plan, dubbed a “mini-budget” caused a freefall in UK markets. The turmoil triggered a 5.1% drop in the quoted price of FTSE 250 index futures expiring in December, compared to 3.2% in FTSE 100 index future equivalents trading on ICE between September 19 and September 26, according to data on its website.

In addition to widening adoption and electronic execution of existing instruments, the exchange on September 12 started offering quarterly expiries for its FTSE 100 Dividend index futures.

The moves will enrich its existing dominant position in its US-based MSCI products, where ICE represents around 70% of MSCI-listed derivatives volume traded globally, according to published volumes from exchanges.

That spans its MSCI All Country World Index (ACWI), World, Emerging Market, Europe, and the EAFE benchmarks. In general, the equity derivatives segment has benefitted from increased market volatility, with a 36% increase in year-on-year equity index revenues in the second quarter, according its second quarter results published in August.

That has been partly driven by an increased focus on margin efficiency, which has been helped by the roll out of an updated portfolio-based margin model, called IRM 2.0 at the start of this year.

“In the context of margin efficiency, and the flow coming out of that trend, the growth we have seen has come from our MSCI franchise, and going forward with the new products that we are looking to launch we will see similar margin efficiencies in our FTSE franchise as we hold the largest pool of FTSE UK derivatives open interest globally,” Caramaschi said.

"On our two largest MSCI index futures, the MSCI EM and MSCI EAFE, they are the largest MCI Futures contracts globally in terms of volume and notional open interest and rank in the top ten Index Futures globally in terms of notional open interest."

IRM 2.0 is a new Value-at-Risk based portfolio margining methodology that models the behaviour of a portfolio as a whole, part of an industry-wide move from measuring risk on an instrument-by-instrument basis.

“As with the FTSE UK derivatives, ICE also holds the largest pool of MSCI Futures open interest, so when we rolled out IRM 2.0 on ICE Clear US for our MSCI Futures at the beginning of the year, the portfolio margining methodology brought even further risk-appropriate capital efficiencies for clearing members and their customers,” Caramaschi said.

Following its success with buyside adoption of its MSCI universe, ICE started adding its ESG indices in 2019, with the ESG Leaders, Climate Change, Low Carbon and latterly Climate Paris Aligned indices in February this year.

“When we were looking to grow that MSCI partnership it made sense to partner with the leaders in this space and we have built a wide-ranging offering that trades alongside our most liquid contracts,” she said. “The MSCI ESG leaders has had the biggest traction, while the Climate Paris- Aligned contracts are at the newer end of the spectrum, we launched just before the Ukraine conflict affected sentiment, but we are very much still focussed on growing this market.”

With both the MSCI and FTSE coverage, the exchange believes it is well placed to expand the range of ESG offerings as demand and standards evolve in the nascent space, with many firms looking to customise their use of ESG products.

“All the index providers came out with very different ESG and Climate Index methodologies, to cater for the spectrum of demand,” Caramaschi said. “MSCI for example have the MSCI ESG Leaders, the MSCI Climate PAI, MSCI Low Carbon etc which all have different levels of selectivity. What index providers are now looking for is to meet the need from clients for some harmonisation and transparency. Index providers are looking to minimise the tracking error versus the main index and still offer “real” ESG. From our perspective we have licenses from a range of providers to give us the ability to move into stricter scoring depending on demand and regulatory developments in the space.”

Caramaschi has experienced this journey first-hand, having started at LIFFE in 2001, just after the exchange closed its famous open outcry pits, and seen the firm develop through its acquisition by Euronext, subsequent merger with the New York Stock Exchange and ultimately takeover by and rebranding under ICE in 2012.

She sees parallels with the transformative shift the business saw with the launch of its Bclear over-the-counter clearing service, leading to an explosion in offered instruments and customised instruments. The question of how best to cater for the remaining OTC flow on exchanges persists today with markets feeling the impact of the implementation of phase 6 of the Uncleared Margin Rules (UMR) in September, as well as the roll-out this year of the updated Standardised Approach for Counterparty Credit Risk – a Basel Committee calculation of derivatives positions that affects dealer holdings of derivatives.

“At that point all the feedback we were getting was that the exchanges were only seeing about 20% of the equity derivatives business because the other 80% was executed in the OTC markets,” Caramaschi said. “The big question for all listed venues was how to get that business on exchange. People are still asking that question in the context of UMR and SA-CCR.”

A report published by trade body the International Swaps and Derivatives Association in 2014 estimated that the former NYSE-Euronext Bclear platform had listed 2,419 unique single name futures and 2,410 single name options, including dividend adjusted single stock futures.

In the year to September 26, that trend has continued with UK single stock option average daily volume up 13% on last year to 38,500 lots. MSCI futures are up 21% by the same measure, with open interest at 1.87 million contracts across futures and options, while both FTSE 100 and 250 index futures are up 11% and 18% over that period. The key shift for Caramaschi was the flexibility embedded in the initial offering, which has stood the firm in good stead as prolonged volatility has meant more pockets of demand from clients.

“As a firm the transformative point was the launch of BClear, which was when the equity derivatives franchise really took off,” she said. “We started offering single stock options on multiple different underlying exchanges, and we also added the FTSE family of products to that service. The benefit was we were able to offer a flexible product to trade as opposed to the standard strict contract specifications that were on the order book. You could choose the expiry, the strike price, and the settlement method. That additional flexibility meant the number of contracts we were offering became vast.”