Our December 2006 cover story reported how custom indexes have become the talk of the structured products markets worldwide. And index provider Standard & Poor's (S&P) has without a doubt been at the forefront of developments in this area.
Custom indexes are effectively 'build your own' indexes that involve a partnership between an investment bank and index provider, which acts as the calculation agent. The indexes can give clients access to new and interesting thematic indexes, and the banks use index providers to secure that all-important regulatory stamp of approval.
S&P has enjoyed considerable success launching custom indexes in the US (its custom index business is run out of New York), which is a market that usually follows trends in Europe rather than setting the agenda.
S&P has developed several innovative indexes for French investment bank BNP Paribas, which have been used as the basis for products issued in the US. And S&P can also lay claim to being the calculating agent for the issuance of structured products over the Bear Sterns Adagio suite of indexes, based upon a sector-rotation methodology proprietary to Bear Sterns.
But perhaps the biggest uptake of S&P's custom offerings in the US has come from Jefferies & Company. The investment bank made a big push into structured products last year and signed S&P to develop 20 new indexes. The indexes, which were as diverse as Global Clean Technology, Global Oil Service, Smallcap Biopharma and Global Exchange, were all used as the basis for new structured products.
"There has been a huge increase in the number of customised equity strategies and structured products being offered to the Americas markets this year," says Tim Eisenhauer, New York-based head of S&P's Custom Index Group. "And S&P provides the requisite analytical expertise and independence to construct custom offerings."
Market exposure, and strategy developments
Although custom indexes have caught the market's attention, S&P remains at the top of its game when it comes to market exposure indexes. The S&P/Case-Schiller Home Price indexes, for example, which were launched in May last year, are designed to measure the average change in home prices in a certain geographic area. They cover 10 major metropolitan areas, and are also aggregated to form a national composite. The indexes measure changes in housing market prices given a constant level of quality. Futures on the index trade at the Chicago Mercantile Exchange, and Goldman Sachs is issuing structured products on the indexes in the US.
In addition, as Structured Products went to press, S&P was due to launch the first investable preferred stock index for Canada. Canadian investment firm Claymore plans to issue exchange-traded funds and structured products on the index.
And when it comes to strategy-based indexes, S&P has also won fans across North America. The S&P Dividend Aristocrats had two successful rounds of certificates of deposit issuance by California-based bank Wells Fargo and the S&P Pure Style Strategy index (which rotates between S&P 500 pure growth and S&P 500 pure value based on technical and fundamental factors) has been licensed to JP Morgan, another US heavyweight.
Nor should we neglect to mention one of the biggest index stories of the past few years. Earlier this year, S&P acquired the Goldman Sachs Commodity Index (GSCI).
The GSCI is widely considered to be the benchmark for commodity indexes and serves as the underlying for many structured products. It will be renamed the S&P GSCI Commodity Index. The GSCI was created in 1991 and covers 24 commodities. Various market estimates say the index is tracked by $60 billion of investment.
Together with S&P's focus on staple index offerings, custom indexes and market exposure and strategy-driven offerings, the acquisition looks set to further solidify the index provider's dominance in structured products - not only in North America, but globally.
WHY STANDARD & POOR'S WON
An impressive custom index business means S&P has become the brand of choice for banks looking for something a little outside the norm. Those who license S&P's indexes across the Americas speak highly of its brand name and its calculation expertise.
The week on Risk.net, December 2–8, 2017Receive this by email