CME head of options Sammann tracks the Merc's volatility journey

The CME Group Volatility Index (CVOL) suite has been steadily growing over the past two years as the US exchange giant has rolled out indexes based on its liquid options markets.

The CVOL story began in late 2020 with US treasury and G5 currency futures, and has since evolved to include volatility in five of CME’s core assets classes: ags, energy, metals, fixed income and foreign exchange.

The CVOL indexes reflect the 30-day forward-looking implied volatility of an underlying futures contract based on the information contained in the prices of CME Group's robust options markets.

CME insists that only it can offer this breadth of coverage in volatility indices as only the US group has the depth of liquidity across commodities, fixed income and FX.

A major milestone was passed in August this year when CVOL moved to real-time pricing, enabling traders to track key risk signals as they happen. The exchange is also talking to clients about the next phase of its volatility journey including the possibility of launching CME's first volatility derivatives contracts.

And never have traders needed these kinds of signals more, according to Derek Samman, CME Group senior managing director, and global head of commodities, options and international business.

“If ever there were a time when people were aware of volatility, it must be the two-and-a-half years since Covid with the related disruption and, more recently, the war in Ukraine.”

Sammann continued: “We run the largest and most diverse options exchange on the planet, with core liquidity and benchmark products in all six of the major asset classes, fully electronic and lit for 23 and-a-half hours a day, five and-a-half days a week.”

The CME senior MD said the group’s options markets have taken off this year, reporting average daily trading volume of over 4 million lots in the nine months to the end of September, up over a quarter on the same period last year.

“Because we have deep global liquidity in benchmark products and it’s all our own IP, customers said they like trading options with us but they didn’t have the sophisticated tools to take live-streaming options prices and apply that to live-streaming volatility and reverse-engineer a volatility level.”

Sammann added: “Clients said they wanted us to give them a way to understand, quantify and use volatility information to better understand what is going on in their markets.”

The implied volatility standard is CBOE’s Volatility Index, which tracks equity options prices on that Chicago-based exchange. CBOE also offers a VIX futures contract, which is that group’s most liquid future, and a VIX option, which is CBOE’s second most popular option after the S&P 500 Index (SPX) option.

CME has not at this time launched a CVOL index that refers to underlying equities prices, though this is not out of the question, according to Sammann.

“We don’t have a volatility index in equities yet but we are working through what that looks like over time. Talking to customers, they needed something other than just a volatility index for equities, rather they want to know what is going on in gold, oil or in treasuries for example.”

And Sammann said CVOL has a different methodology to VIX. “When we think about the volatility tools that are available, clients saw what we saw, which was a limited set of products determining volatility only in equities that had a limited use because it only uses at-the-monies. We decided we wanted to build a volatility index that looks at the entire volatility surface.”

Sammann added: “We solve client problems and there is not a client problem in equities. Equities has VIX and they have used it for a long time. By contrast, there have not been successful volatility indices in the other five asset classes. Equities is only one of six asset classes out there with an existing tool for measuring volatility whereas there is a gaping hole in non-equities volatility indices. That is the problem we are solving for our customers.”

The CME senior MD has this year taken on the additional responsibility for running CME’s growing international business as CME’s current head of international William Knottenbelt prepares to retire at the end of 2022.

Sammann said the international segment is going from strength to strength.

He said: “Overall, the business is up 23% this year and that reflects growth in every region. We closed out last year at 5.5 million contracts a day for our non-US business which was a record. This year we are averaging over 6 million. Every quarter this year has been all-time record quarter so the trading volume by region continues to grow.”

“Third quarter non-US average daily volume (ADV) was 6.1 million contracts, which was up 21%. Europe, the Middle East and Africa had ADV of 4.2 million contracts, which was up 14% year-on-year. Asia-Pacific had 1.6 million contracts each day in the third quarter which was up 41% and LatAm was up 31% though from a lower base.”

The CME senior MD said demand has held up in Europe despite the problems related to the Russian invasion of Ukraine.

“We have not seen a pull-back in Europe, partly because we are not dependent on one European product. We run global benchmark markets so when volatility hits and equity markets are going crazy, they are largely piling in to and out of US stocks which benefits our equities franchise.

Sammann continued: “Asia goes from strength to strength and it was nice to see some China rebound this year. If we think about our client penetration maturity levels, in the US we are mature in terms of access, in Europe I’d use the term “middle innings”. Currently we have 62% of our sales force outside the US because that’s where the marginal growth is.”

The CME senior MD said Singapore and Dubai are particularly buoyant at the moment, which is opening up new client opportunities.