Land Grab in Hot Bond-Index Business Lures ICE, London ExchangeBy , , and
ICE strikes deal for BofA unit days after LSE-Citi transaction
Massive shift to passive investing is spurring exchanges
The world’s largest exchanges are buying bond indexes to profit from the shift to passive investing, announcing two deals in three days.
Intercontinental Exchange Inc., owner of huge derivatives markets and the New York Stock Exchange, said Thursday it’s acquiring Bank of America Corp.’s bond-index arm for an undisclosed amount. That followed London Stock Exchange Group Plc’s $685 million deal two days earlier for Citigroup Inc.’s similar business.
Indexes are increasingly important in the debt market, where there’s less trading than in stocks or futures. Getting into a benchmark often means a company’s bonds are far easier to buy and sell. Given that investors are shifting away from active strategies in favor of just buying whatever’s in an index, these metrics are more attractive to exchanges, which can create new sources of income by introducing futures contracts or ETFs linked to the indexes they own.
The banks that created the most popular bond indexes have become willing sellers, said Mark Makepeace, chief executive officer of London Stock Exchange Group’s FTSE Russell indexing division. Changing regulations have made it harder for banks to operate index compilers and trading operations alongside each other, he said.
“I do not think they fit in banks,” Makepeace said in an interview. “Given the change in environment, I think people could see conflicts of interest. I believe all of the banks will exit providing these types of services.” This week’s dealmaking leaves JPMorgan Chase & Co. as the last bank with a sizeable bond-index business, he said.
Passive Versus Active
The growth of passive investing probably means banks are getting good prices for these businesses. Investors have added $1.5 trillion of assets to passive strategies since 2013 while yanking $800 billion from active investments, according to data compiled by Bloomberg. There’s $488 billion in passive fixed-income ETFs in the U.S., the data show.
“The attractions of selling are that indexes remain in high demand,” said Bloomberg Intelligence analyst Arjun Bowry. “The valuation multiples are quite attractive.”
This isn’t ICE’s first foray into this area. It acquired bond indexes and analytics through its $5.2 billion purchase of Interactive Data Corp. in 2015. With the Bank of America deal, ICE says almost $1 trillion of assets will be benchmarked to its indexes. The transaction gives it more than 5,000 benchmarks tracking bonds, currencies and commodities.
For LSE’s index business, FTSE Russell, the Citigroup purchase was all about increasing scale. FTSE Russell is in a contest with MSCI Inc. and S&P Global Inc. to amass the most comprehensive range of indexes under the same roof, enabling them to extract more revenue from the world’s biggest investors. That trio of companies has, among other things, some of the most popular stock benchmarks in the world, including the U.K.’s FTSE 100 Index, the MSCI World Index and the S&P 500 Index.
Exchanges aren’t the only buyers. Bloomberg LP, the parent of Bloomberg News, spent 615 million pounds ($923 million) to purchase Barclays Plc’s bond-analytics business in August.
ICE will slot its new business -- which will be renamed ICE BofAML indexes -- inside its data-services division, the company’s second-biggest revenue generator after transaction and clearing fees. That unit grew 9 percent to $520 million in revenue in the first quarter compared with the year-earlier period. In addition to owning the NYSE, ICE is a dominant player in European derivatives trading with contracts linked to oil, gas and interest rates.
LSE’s FTSE Russell index business is part of its information-services division, which produces more than 35 percent of the company’s income, according to a Bloomberg Intelligence report. More than 70 percent of that comes from FTSE Russell.
— With assistance by Rachel Evans