New Delhi: Standard and Poor’s (S&P) has licensed the National Stock Exchange (NSE) to list rupee-denominated S&P 500 futures and options (F&O) contracts. It’s the first time that the world’s leading index provider has listed an F&O contract, trading on which started locally on 12 September, outside the US. Indians can now invest in the US stock markets without any currency risk, said Craig J. Lazzara, senior director, US equities, S&P Indices. In an interview, he spoke about the reasons for choosing India and the benefits for local investors. Edited excerpts:
What were the reasons behind you choosing India to list the S&P 500 F&O contract?
S&P 500 is the leading index in the world in terms of assets benchmarked or assets indexed to it. Our relationship to the derivatives market goes back to the early 1980s. At the same time, when we look at the world, India is a rising economic power, and we obviously want to participate in that growth in any way we can.
This is the first time an index contract from S&P 500 has been listed in a country other than the US and traded in a currency other than the dollar. So from the standpoint of product innovation, it’s a nice innovation. From the standpoint of what it does for the Indian investor, it means that an Indian investor can have exposure to the US markets without having to bear the risk of a falling dollar. So this product will help Indian investors and traders to participate in the US markets without any currency risk.
It’s a huge market. It’s a growing market. We have had a prolonged relationship with India. You don’t find that combination often.
How has the initial investor interest been?
The initial interest has been good. Its smaller than the Nifty (benchmark index of the NSE), but that will happen. The response has been good, both in terms of trading volumes and in terms of open interest, which is a very good sign.
But do you expect this interest in F&O contracts to sustain?
It will take time. We have done road shows already in India. We are meeting with NSE members and traders. It’s an educative process. Twenty years ago, ETF (exchange-traded funds) had not been invented. It was invented in 1993. Now ETFs are the largest, most-traded stocks in the US. Earlier, it was not the case. The product had to be explained. How is it different from a stock, from an option.
Obviously, there are educational challenges. Indian investors need to learn that there are ways to diversify outside India that involve the US without taking risks. There is no reason to suspect from what I see that Indian market can be as successful as the US over time.
Are you targeting mainly institutional investors with this product?
This product is for both institutional and retail. There is nothing in the product that makes it inappropriate for retail investors. It depends on how the retail market place is educated. The products are not so huge in size that an individual cannot buy one.
What are the other fields of collaboration that you are exploring?
We are already involved with the NSE in the Nifty. We think this contract has great potential. I don’t want to speculate on other areas. We let the market tell us what opportunities are there. One would have never thought some time back about a contract in India denominated in rupee. We have a wide range of other products and we we will be happy in bringing these to India. But it all depends on the kind of products that generate investor interest.
In the US, we are seeing a couple of things. There is a lot of interest in our mid-cap index, partly because it’s done well relatively to other mid-cap offerings and the large-cap index.
S&P 500 is a dominant index in the US. It’s a good thing, but it is also bad thing as people then wonder that it is the only index we offer. We have made a concerted effort to tell people that there are other alternative indices offered by us. We are seeing both institutional and retail interest.
We have introduced very recently a slice of S&P 500—S&P 500 low-volatility index, a subset of 500 designed to be
less volatile. Those are the things that we do in the home market, and what we will do here will depend entirely on the feedback that we get from traders.
The markets are much more volatile now. What is your outlook for the equity markets?
Obviously, equity markets have been troubled worldwide—US and Europe. There are much better buys today than three months ago. Heightened volatility makes it scarier for investors, but it can be good for options traders and investors. You can take an exposure to the US market with the guarantee that you will not lose your principal, and the call option gives you a way to do that. So it’s a challenging outlook, but there are instruments that can give you good amount of flexibility.
Volatility has been rising. Since July, we have seen a considerable increase in volatility. Intra-day volatility has been quite high. The nature of volatility is such that when it rises, it rises quickly, but when its coming down, it slow. Even if there are no further increases in volatility, it will take some time for the volatility to start coming down.
Has there been a shift in investor interest from equities to commodities?
We certainly see interest in commodity indices. In terms of flow of funds, can’t say an absolute shift. But in terms of interest, definitely. But obviously equity markets are down. Over a long period of time, commodities have a low correlation with equities. But that’s not always the case. If the reason equities are going down is fear of inflation, then commodities tend to be a good diversifier. If the reason equities are going down is because people fear that the economy is going down, then commodities may not be a good option.