S&P to launch new world commodity index; broad interest from issuers

By Emma Trincal

New York, April 9 - Standard & Poor's is readying a new commodity index that it hopes will complement its current S&P GSCI benchmark as a reference asset for new products, Mike McGlone, senior director of commodities indexing at S&P, told Prospect News.

The S&P World Commodity index will contain eligible, liquid and tradable commodity futures that are listed on exchanges outside of the United States.

It will follow a methodology similar to that of the S&P GSCI, said McGlone

"We're shooting for an April 29 launch," said McGlone. "This index will measure the commodity market based on commodities futures ex-U.S. It's very much of a complement to the S&P GSCI. It's a global index," he said.

A non-U.S. index

However, the important difference between the S&P GSCI and the new index is that the S&P WCI will not include any U.S. futures in its composition.

"While the GSCI is a U.S. index and a U.S. dollar-centric index, this one is a multicurrency index that doesn't include U.S. commodities. It's more of a world index," he said.

Such a product, less centered on the U.S. market, was created based on client demand, McGlone said.

"We expect plenty of demand from Asia and Europe, and we will be launching regional sub-indexes for these two regions," he said.

McGlone said that the launch dates for these two sub-indexes was not yet determined.

Reducing CFTC risk

Another reason for the strong demand may be some of the risks associated with pending changes in U.S. regulation regarding commodity futures contracts, said McGlone.

Some investors in commodity-linked notes as well as issuers have expressed concerns about the impact of a new rule on position limits currently under review by the Commodity Futures Trading Commission.

"The WCI index excludes U.S. commodities, and some see in this a way to be protected from potential new rules, in particular the increase of position limits the U.S. regulator may impose on futures contracts. I suspect the regulatory concerns might be part of what drove clients' demand," said McGlone.

"But it's also the need to diversify away from a very U.S.-centric index that led us to create this new index. There is a decent demand for an international commodity index that will complement the GSCI," he added.

For structured notes

The S&P WCI, as other indexes, is designed to be used as the foundation of securities, notably structured notes, McGlone said.

"We're seeing a widespread interest from issuers both in the U.S. and outside of the U.S. for using this index as a new underlying for their structured products offerings. There's definitely an interest for structured products," said McGlone.

The new index will be rules-based with a world production-weighted approach similar to the S&P GSCI.

It will contain 22 commodities in 2010.

"The whole methodology is similar to the GSCI, and we wanted to use our main index as our foundation, obviously with the key difference of excluding the U.S.," said McGlone.

Beyond equity

"Our expectation based on the demand we've seen for an index like this is to have a great amount of interest. This is part of S&P's strategy to expand its indexes beyond equity," he said.

"In the old days, if you wanted to be exposed to commodities, you would have to buy stocks in the commodity sector," he said, adding that the negative aspect of this strategy was to have a high correlation to equity.

McGlone said that the S&P GSCI, which was "the first tradable commodity index," has allowed investors to get exposure to commodities with a low correlation to stocks.

"There is now a broad interest in the market for commodities. In the past 10 years, commodities have become much more of a real asset class. Retail investors know that investing a portion of their portfolio in commodities is prudent," he said.

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