As investors look for new ways to diversify fixed income portfolios, ICE’s new fixed-income benchmark - the ICE 8-13 Year European Union Index - fills a key gap in the European bond market.

The index is made up of 13 securities, has an approximate 10-year effective duration and provides exposure to one of the most critical points on the yield curve for measuring market movement.

Unlike traditional bond futures, the cash-settled futures contracts benchmarked to the index avoid physical delivery, in a move that could potentially significantly enhance liquidity of European Union debt.

In this Q&A, Alberto Ruiz Sena, head of EMEA fixed income index product at ICE Data Indices, explains the rationale for the launch, design, and market impact of the new index.

What was the rationale behind launching the ICE 8-13 Year European Union Index, and why was a 10-year duration chosen?

The rationale was to launch an index that included a basket of European Union issued bonds with an average effective duration of approximately 10 years. We found that the sweet spot was the 8–13-year maturity segment and we built an index for it.

The 10-year area of the yield curve is the standard for measuring market movement, and the tenor most often used in futures trading to hedge interest rate exposure in EUR denominated bonds.

The main advantage of a basket is that it offers a diversification of instruments with similar risk and exposure characteristics without being overly broad.

The index currently includes 13 securities. The index tracks the economic exposure of a roughly 10-year duration instrument and is benchmarked by futures contracts.

The futures will be cash-settled rather than physically delivered, avoiding the complexities of having to provide the cheapest to deliver bond at the expiration date, when many traders are chasing the same bond to settle the contract. A cash-settled instrument can also open up European Union debt to a larger pool of liquidity.

What sets this index apart from others on the market?

Following the results of the ICE 2024 Fixed Income Index Rule Review, European Union bonds did not get reclassified from Supranational to Sovereign, but we realised that there was a need in this segment of the market that could be filled with a new series of indices.

We launched one series of European Union bond indices with different maturity buckets, and another index series with similar maturity buckets that include both European Union and Eurozone Sovereign bonds.

To assist with pricing transparency on the futures contract, we also launched a real time version of the 8-13 year index.

One of the key differentiating factors of the real time index is the use of ICE’s Continuous Evaluated Pricing (CEP) real-time bond pricing which contributes to ICE’s ability to calculate ETF intraday net asset value (iNAV) calculations.

How was the ICE 8-13 Year European Union Index constructed, and how does your Custom Index Tool contribute to its design?

The ICE Data Indices Custom Index Tool (CIT) played a fundamental part in the index development. We were able to quickly move from a concept index to have it up and running on the ICE Index Platform (IIP), and on some of the third-party data platforms where we usually display our indices.

That included top level and constituent level data, including daily historical data for both top level and constituents, including over 100 different data and analytical fields. The CIT allows internal and external index users to quickly and easily prototype historical back tests for potential new indices.

Starting with one or more parent indices, either market weighted or fixed weighted, the user can then apply inclusion/exclusion filters, apply caps, floors or target weights to the starting index or to specific custom segments, modify attribution buckets, add hurdle rates, and create data rankings by number of securities or percentage weight.

Once the user is happy with the back test results and wants to activate the index, they need to contact the ICE Index product team who will carry out additional checks before releasing the index.

As soon as the prototype is verified as being correct, the new index can be released onto the ICE Index Platform, subject to the proper licensing and approvals being in place. Customisation has always been one of ICE Data Indices’ strengths, but the development of the CIT has improved and strengthened our capabilities in the space.

This year alone the EMEA fixed income product index team has been able to release more than 300 new fixed income indices, which represents more than one index released per business day in 2024.

Can you provide details about the composition of the index?

The index is currently composed of 13 European Union bonds issued in the Eurobond or Euro member domestic markets with a remaining time to maturity greater than or equal to 8 years and less than 13 years.

As of 2nd January 2025, the index captures a total of €103bn in face value, so an average of €8bn per instrument, with a maximum of €18bn and a minimum of €1bn.

It has an average effective duration of 9.50 years (with a constituent range between 11.71 and 7.11 years), and a 2.88% effective yield (with a range between 3.04 and 2.62%).

The ICE 8-13 Year European Union Index average effective yield currently offers a 0.54% yield pick-up compared to a basket of equivalent German Government bonds within the same 8–13-year maturity bucket.

As the European Union has a AAA composite rating - the same as Germany - the index also represents an attractive option to be used as benchmark of a high-quality AAA-rated ETF product.

Are there plans for ICE Futures to develop similar products based on indices with different maturity buckets or tenors?

ICE is always willing to expand its product offering. If there is client demand for futures or options on different maturity buckets or tenors, we are happy to accommodate.