Game Changers Galore Across Indexing

The last few years have been marked by a significant reshuffling of corporate interests in the business of providing indices. In the latest deal, S&P Indices and Dow Jones have announced that they are seeking to merge their efforts in indexing. Paul Amery, editor of, spoke to Alexander Matturri, currently executive managing director at S&P Indices but soon to become CEO of S&P/Dow Jones, to find out what’s driving the corporate finance deals. What’s the thinking behind the recently announced joint venture between S&P Indices and Dow Jones Indexes?

Matturri: This is a culmination of a long term relationship between Standard and Poor’s and the Chicago Mercantile Exchange (CME), which dates back to 1982, when we jointly launched the S&P 500 futures contract [CME Group has owned 90% of Dow Jones Indexes since early 2010— comment].

There are two main elements to the transaction. The first is the joining of the index businesses themselves. Although we plan to maintain both sets of indices and brands, those brands cater for different audiences: S&P is more prominent in index products, and is more institutionally used; while Dow Jones Indexes has been more of a “headline” brand in equities, as well as having large Shariah and commodity businesses.

The second element of the merger is the potential cost synergies to be realised by consolidating both back-end operations, the index calculation businesses, pricing feeds, and so on. There are a lot of stocks held in common between the two sets of indices. Where do you see the greatest growth opportunities in the indexing business?

Matturri: ETFs are growing in importance to us, with probably about a third of our revenues raised from these products. There are about US$380 billion in assets in 500 ETFs worldwide, tracking either S&P or Dow Jones indices. That will continue to grow, and we’re devoting more attention to ETFs. Won’t the combined index business still be heavily US-focused? How are your revenues derived by both geography and asset class?

Matturri: We don’t reveal the actual split of revenues in this way, though we may provide more information in future. But we certainly view our business as global. It’s also difficult to categorise exactly where revenues come from. For example, if iShares issues an ETF in Asia on one of our US indices, it generates dollar-based revenues, even if it’s an Asian ETF being used by local investors.  Or, in another example, 20 percent of the revenues from trading the S&P 500 futures contract come from transactions conducted outside US market hours. Wouldn’t it make sense, though, to merge indices that may be competing in the same asset classin commodities, for example?

Matturri: For the time being we have no such plans, and the commodities indices will remain as they are. Any index that has products associated with it will continue to serve independently under the name of either Dow Jones or S&P. There won’t be any jointly branded S&P/Dow Jones XYZ index, for example. In the press release accompanying your joint venture, you mention that you’ve moved to a new contractual relationship with CME. What’s the thinking here?

Matturri: Historically, CME has been a licensee of S&P on a per contract basis. We’ve decided to align our economic interests better, and S&P will now be paid a percentage of the gross profit generated by CME’s equity business. As markets evolve and there’s increasing pressure for the central clearing of swaps and other instruments, this gives us more flexibility for implementing new product ideas. What is the difference between a benchmark and a product index?

Matturri: To us, a benchmark is a broad representation of a market segment. It covers ideally 100 percent of the segment’s capitalisation, although in practice you probably wouldn’t get more than 95 percent coverage. Benchmarks are great for measuring investment performance but not so good for trading.

When we construct indices for products we’d prioritise liquidity over coverage.

The S&P 500 fits both descriptions: it’s a broad benchmark, but it’s also a product index in that it is tradeable.

So, we choose the terminology carefully, and if an index is built for product purposes it must be representative and liquid, but is not necessarily a broad representation of the market. How much of your revenues are derived from managing benchmarks, and how much from investment products associated with your indices?

Matturri: Roughly 80 percent of our revenues are driven by products and typically on the basis of a share of assets under management. Our benchmark business follows a data model, where we sell data to clients for risk management or performance evaluation purposes. Going forward, we, as well as most of our competitors, are focusing our efforts on the product space. How are you coping with the increased competition in the index business? Everyone seems to be going global in the last year or two, with Russell also expanding its business outside the US, and Stoxx moving in the other direction.

Matturri: It’s still a good business to be in. S&P and Dow Jones started out in the US with headline indices and we are still expanding. We feel we have the broadest set of indices because we cover all the asset classes. We certainly have great competitors who are strong in certain markets, but we don’t think any of them are as strong as we are in all the markets.

MSCI is a very successful global equity indexing business, but they are not in the commodity space. In contrast, we have already advanced into commodities and are building out our fixed income segment. We will also continue to push out more indices catering to client needs. For example, we’ve launched health care economic indices and the S&P Case-Shiller real estate index. We have dedicated teams looking at next-generation product ideas, for which it may be years down the road before any tradeable products are built, because we think it’s important to plan ahead. Isn’t it difficult for an equity-focused index firm to move into fixed income, given the non-transparent pricing of many parts of the bond market?

Matturri: Clearly, there are pricing challenges for fixed income, as bonds are not exchange-traded. But we overcome this problem via partnerships with different pricing sources, including the banks.

We already have the leading municipal bond indices in the US, and have just launched fixed income indices with the Australian Stock Exchange (ASX). Some firms—Barcap, for example—have a stronghold in fixed income, but we feel we have a space and we’ll play the game where we have a competitive advantage. Overall, though, bonds will play a smaller role in our business than equities and commodities. How has the pressure for increased regulation been affecting index providers? The ESMA discussion paper on ETFs and structured UCITS in Europe, for example, devotes quite a lot of comment to indexing. Have you had to devote additional resources to this area in the same way as banks?

Matturri: We definitely keep an eye on the regulatory debates, but it’s more of an issue for product providers than for us. At the end of the day, we provide the index, and how it is used in the product wrapper is mostly the issuer’s concern.

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