NZX Ltd. (NZX), operator of New Zealand’s stock exchange, will offer trading in index futures later this year based on a new gauge of the nation’s most-traded equities - - eight years after a similar venture failed due to lack of investor interest.
The NZX 20 Index will debut on April 23 with a design that should make it attractive to futures traders and fund managers, Rachael Newsome, head of direct products at NZX, said in an interview. Trading in futures on the index is planned to start before June 30, she said.
NZX is betting the contract will bolster trading in underlying shares, attracting foreign funds and improving its fee income, as the government starts its biggest round of state initial public offerings in more than 20 years. Rising market turnover and listings suggest investors may be more supportive of the derivative than in 2004 when a contract based on the NZX 15 index failed to trade in sufficient volume to be a useful hedging tool.
“This is probably as good a time as any to be having another crack” at index futures, said Bernard Doyle, strategist at Goldman Sachs New Zealand Ltd. in Auckland. “You can point to a couple of trends and things on the horizon that suggest it probably makes some sense to put some effort in. They don’t want to die wondering.”
The government plans to raise at least NZ$5 billion ($4.1 billion) by selling shares in four major state-owned energy companies over the next five years, starting later this year. Share trading on the New Zealand bourse rose 21 percent in March from a year earlier, according to NZX figures. Still, New Zealand’s daily market turnover is just 0.2 percent of its value, compared to about 0.3 percent in Australia and more than 0.8 percent in the U.S., according to Goldman Sachs figures.
A new chief executive officer, Tim Bennett, takes charge of the NZX on May 7.
“Equity derivatives is the thing that is obviously missing from the New Zealand market that is present in pretty much any other developed market,” said Newsome. “It ensures that we have a broad offering across all our markets.”
To achieve sufficient volume in the proposed futures contract, the NZX must ensure international investors and market makers can access the market, and that clearing processes are straightforward, said Greg Boland, director of financial markets at OMF Financial Ltd. in Auckland. He was regional manager at SFE Corp. in 2004 when it developed the failed NZX 15 futures contract in collaboration with the NZX.
“Who’s going to access and how is a big issue,” he said. “It’s not a matter of switching a button and saying here we go, we’ve got futures and hoping everyone comes and plays in the sandpit. It might not happen.”
Boland welcomed the design of the NZX 20 index, which will rank stocks based on a so-called free float of shares that excludes blocks held by strategic investors, caps constituents at a 15 percent weight and will be calculated without assuming reinvestment of dividends.
“We like the way the index is,” he said. “It’s a capital index. Having 20 stocks is good. The index make-up is as good as you’re going to get.”
Liquidity will be a core concern for investors, Newsome said. NZX will require an NZX 20 stock to have a trading value of at least 3.5 percent of the issuer’s average market capitalization over a six-month period. Infratil Ltd. (IFT), the nation’s 10th biggest company doesn’t meet this requirement and Nuplex Industries Ltd. will take its place, Newsome said.
The 15 percent weighting cap eliminates the risk of a few large companies dominating the index “which isn’t necessarily good for the health of the index future,” she said. Fletcher Building Ltd. and Telecom Corp. of New Zealand Ltd. will be capped when the index begins, she said.
NZX is applying new liquidity rules and the free-float methodology to most of its indexes, including the benchmark NZX 50 (NZSE50FG) index from June 18, bringing New Zealand into line with the world’s leading stock exchanges.
“Our rules were unique globally,” said Newsome. “That’s not that great. Having things familiar to overseas investors is helpful.”
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