On November 18, 2019, CME Group launched E-mini S&P 500 ESG Index futures. For investors looking to transition positions into the S&P 500 ESG product from existing alternative index vehicles, the following outlines some methods clients may employ.
Before going into detail on these three methods, let’s make some assumptions on the size of the position a participant is looking to transition. Assume the client’s current position is long 600 E-mini S&P 500 futures (CME ticker: ES) and the client would like to transition to the E-mini S&P 500 ESG contract (CME ticker: ESG). If the E-mini S&P 500 futures price is 3,100 this would equate to a notional of $93m (futures price (3,100) * multiplier (50) * number of contracts (600)). The E-mini S&P 500 ESG futures has a different price and notional per contract. If the S&P 500 ESG futures is trading at 263.30 the notional per contract is $131,650 (price (263.30) * multiplier (500)). Thus, to maintain the same notional of $93m the investor will need to trade 706 contracts of the E-mini S&P 500 ESG futures in this example.
By using BTIC (Basis Trade at Index Close) functionality at CME, a client can transition its position in the E-mini S&P 500 futures to the E-mini S&P 500 ESG future. This method allows a client to trade at a “known basis” to the respective official cash indexes’ close.
Assume the basis is -10.00 on the E-mini S&P 500 futures and -0.50 on the E-mini S&P 500 ESG Future. During the day prior to the cash close, the customer agrees to sell 600 E-mini S&P 500 futures via BTIC at a price of -10.00. In addition, the customer agrees to buy 706 contracts of the E-mini S&P 500 ESG futures at a BTIC price of -0.50.
Once the official cash index prices for that day are known, the client will receive a price confirmation for both BTIC transactions. The resultant trades on both the ES and ESG outright futures will be the cash index price + the traded BTIC prices agreed to earlier in the day. For example, if the official closing price was equal to 3,112 and 263.98 for the S&P 500 and S&P 500 ESG indices, respectively; the BTIC trades would result in E-mini S&P 500 futures contracts being cleared at 3,102 (3,112 + traded basis of -10.00) while the E-mini S&P 500 ESG futures contracts would be cleared at 263.48 (263.98 + traded basis of -0.50).
Thus, the participant will have sold 600 E-mini S&P 500 futures via BTIC at a price of 3,102.00, whilst buying 706 E-mini S&P 500 ESG futures at a price of 263.48.
While this example assumed the client’s original position was in E-mini S&P 500 futures, the method of transition against the official cash index close described above can also be applied if one is transitioning out of ETFs or cash baskets as well. The ETFs could be sold at their Net Asset Value (NAV) and the E-mini S&P 500 ESG futures bought via BTIC; or the basket of stocks could be sold in the market-on-close cash auction, and the E-mini S&P 500 ESG futures bought via BTIC.
To learn more about Basis trade at Index Close (BTIC) transactions at CME click here:
It is worth noting the daily correlation of the S&P 500 index and the S&P 500 ESG index is 99.9% according to Bloomberg.1
An investor that is currently long 600 units of S&P 500 ESG futures can use the “roll” to transition their position to the E-mini S&P 500 ESG future. This is most easily done by trading the roll in the Jun/Sep calendar spread and holding the existing contracts of S&P 500 futures to expiration.
For example, if the investor sold 706 units of the June E-mini S&P 500 ESG contract and bought 706 units of the E-mini S&P 500 ESG September contract via trading the “roll” the investor would have the following position:
Long 600 E-mini S&P 500 June Futures
Short 706 E-mini S&P 500 ESG June Futures
Long 706 E-mini S&P 500 ESG September Futures
The resulting futures positions will effectively transition the investors index exposure from the S&P 500 index to the S&P 500 ESG index at the futures expiration on the U.S. market open on the third Friday in June. When the Jun/Sep roll trade in the ESG futures is transacted, the Short 706 ESG June futures contracts will offset the Long 706 ESG September futures contracts and the investor will still be Long the 600 ES June futures contracts. This index exposure will remain as such until both the ES and ESG June contracts expire on that third Friday, and the resultant position will be the Long 706 ESG September futures contracts on a go-forward basis.
The transition point for the index exposure will be the market-on-open auction that underlies the futures expiration. It should be noted that all constituents of the S&P 500 ESG index are circumscribed within the S&P 500 index, and therefore the same individual stock component auction price will be used in calculating the index Special Opening Quotation (“SOQ”) levels used to expire both the ES and ESG futures contracts.
Note the same logic can be applied if the investor is currently short E-mini S&P 500 futures. In this case, one would buy the June contract in the E-mini S&P 500 ESG futures whilst selling the September contract in the E-mini S&P 500 ESG future.
A client who is long exposure to the S&P 500 index or; the S&P 500 ESG index via ETFs or cash baskets; may use the Exchange for Physical (EFP) mechanism to transition to E-mini S&P 500 ESG futures.
The physical position related to the EFP transaction may include a related stock basket, or an ETF or ETN. Acceptable positions are highly correlated stock baskets that represent at least 50% of the underlying index by weight or includes at least 50% of the stocks in the underlying index, as well as ETFs or ETNs that track the index underlying the futures contract or another highly correlated index.
An EFP is the simultaneous execution of an Exchange futures contract and a corresponding physical transaction or a forward contract on a physical transaction
An EFP allows investors to convert between futures and ETFs, ETNs, or baskets of the underlying index constituent stocks; without exposure to intraday market execution. In an EFP, two parties agree to exchange equivalent but offsetting positions in an equity index futures contract and a related physical transaction. One party is the buyer of the futures and seller of physical shares, ETFs, or ETNs, and the other is the seller of the futures and buyer of the physical shares, ETFs or ETNs.
Because both sides of the EFP track the same or similar benchmarks, an EFP is market-neutral. As such, the pricing of the EFP is quoted in terms of the basis between the price of the futures contract and the level of the underlying index.
Further information on the EFP mechanism is set forth in the Market Regulation Advisory Notice on EFRPs, available here: https://www.cmegroup.com/rulebook/files/cme-group-Rule-538.pdf
1 Daily correlation with the S&P 500 Index is 99.8%. Source: Bloomberg as of 04 June, 2020 over the last 12-month period.
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