When it comes to stock-index creations in a hot sector, listed exchanges manifest the intense rivalry of Paris and Milan fashion designers in Spring.

Witness the latest fuss over the CBOE's brand new Internet Index (INX), on which options trading began February 20. Only four months earlier the American Stock Exchange launched its own Inter@active Week Internet Index (IIX) to capitalize on all the Net-hype and the craze for its equities. "While they call theirs an Internet index, it is very broadly defined, with a lot of software companies included," says Joe Levin, vice president of research at the CBOE. "I don't see it as a pure play like ours. And the feedback we've been getting supports that."

The CBOE's creation may look like a knock-off, but it's definitely cut from different cloth. For one thing, it is an equal-dollar-weighted average of Internet players, so no one stock has a disproportionate ability to drive the results. The Amex version, by contrast, is capitalization weighted. As a result a big player in this category, like Cisco Systems, can account for about 20 percent of the movement, while many others have only a one or two percent influence.

Some other differences: the CBOE index has 15 stocks, versus 38 on the Amex. (They have 12 stocks in common.) The CBOE's options are European, cash settled, with strikes at five-point intervals. The Chicago version may also be more volatile, according to Salomon Brothers vice president in equity derivatives Leon Gross, who reconstructed the price histories of stocks in both indices. "Some of the more volatile names, such as Netscape, Spyglass and UUNet, have a larger weight in the equal-weighted CBOE Index," he says. "By having fewer names, the CBOE index is less diversified."

Gross points out that volatilities in some of the underlying Internet stocks often hit 100 percent. In fact, volatility for the Inter@ctive Week index was in the 40-plus range last December, confirming what most people suspect: that the sector trades as a group and that investors apparently do not discriminate between these companies. Volatilities, however, seem to be declining as investors regain their sanity. For example, 10 and 20-day historic volatilities in the Amex index dropped to around 20 as of mid-February. That suggests an increase both in Wall Street analysts' coverage and in discrimination between these stocks. The stocks themselves have cooled down as well. (See chart.)

The Amex's Inter@ctive Week index is clearly a success. Last year average daily volume was 1,172 contracts; in January it was 1,500. "Some sector indices trade five, 10, 20 contracts a day," says Gross. "Compared to other sectors, this index is quite robust."

Here's a final fashion note. Last month the New York Futures Exchange announced yet another creation: it applied for permission to trade futures and options on the Pacific Stock Exchange's Technology Index, which is heavily weighted with Silicon Valley players but heretofore only lightly traded.

By Simon Boughey

Anyone who has been collecting derivatives reports will have groaning bookshelves by now. First the derivatives industry received the massive G30 report on risk, then the OCC's voluminous risk study BC-277, followed by the Federal Reserve's version, SR-93-69. More recently there's been a study by the Derivatives Policy Group, the Basle capital adequacy directive and a paper on value-at-risk by the International Organization of Securities Commissions. As if that were not enough, the British office of accounting firm Coopers & Lybrand has published a 227-page document entitled Generally Accepted Risk Principles (GARP), available for $90.00.

The study's recommendations to users are delivered in 89 keynote principles, says Joel Tancer, a partner with Coopers & Lybrand in New York. These precepts give the board of directors ultimate responsibility for implementing and monitoring a coherent risk management strategy.

This is not a new message. The G30 report, unveiled in July 1993 at the height of the great derivatives scare, stressed the importance of board comprehension and control of risks undertaken. Indeed, some readers of GARP have noted similarities to the G30 report in both the tone and the structure. Says a senior official at the Federal Reserve: "I don't want to suggest value hasn't been added, but all these things are in essence derivative of the G30. When I saw GARP, there was a sense of 'Here we go again.'"

GARP, however, lays out the principle of internal control in exhaustive detail. For example, there are over 50 pages devoted to an examination of risk management strategy and the policies to be followed.

The study argues that risk management objectives are critical to a company's business strategy, that all areas of a firm must function in an integrated fashion, and that companies should try examine a wide variety of risks they may be exposed to. It also recommends establishing a separate executive-level risk committee that reports directly to the board, as well as an independent risk management department to keep the board up to date.

GARP is aimed equally at dealers and end-users and has been prepared with the assistance and guidance of bankers, central banks and regulators, including BZW, JP Morgan, the CFTC, the SEC, Britain's Securities and Investment Board and the Bank of England. Assembling the study took almost a year from the working lives of 10 souls at Coopers & Lybrand. Tancer says that there has been very good demand for the document from both dealers and end-users.

Whether GARP will supplant its competitors as a standard remains to be seen. The new venture is competing with several independent risk management consultants that already have a bit of marketing, promotion and client contact under their belts. But there is room for one more, concludes Tancer: "There have been enough corporate disasters in the last couple of years to indicate that there is still a big need out there."

Seems that dealers, their lawyers and their lobbyists spend a lot of time coming up with liability reduction fixes. The latest try issues from the Derivatives Policy Group, an organization for bank dealers. Last March it proposed a boilerplate disclosure statement that would emphasize the arms' length caveat emptor relationship. As a trial balloon, the generic language prepared by Credit Suisse Financial Products was floated before the Office of the Comptroller of the Currency. The response? The OCC refused to endorse this or any other such generic disclosure language. It wants to see tailor-made risk assessments for each deal-a feature that will surely make selling derivatives touchier, and pump up dealers' legal costs as well.

The past four months Astrogamma has been making a highly unusual attempt to control software piracy: an amnesty program for bootleg copies of FENICS, the industry's leading FX options package. In an ad placed in FX Week president Michael Adam stated his terms: "We will not take any punitive action against anyone who approaches us to purchase a copy of FENICS until March 31, 1996." If the purchaser later turns out to have a version already installed, Astrogamma will just wink. However, those who don't symbolically turn in their weapons will face the full blast of legal retribution if caught.

Astrogamma reckons that the 30 software pirates it has stumbled across and nailed for infringement-in some cases getting substantial punitive damages-are only the tip of the iceberg. Astrogamma sales records indicate that FENICS has about an 80 percent market share, but that close to 100 percent of the estimated 1,000 interbank FX players are using it. At a basic sticker price of $25,000, that computes to a shortfall of between six and eight million in lost sales and update fees.

Was the program a success? That's hard to measure, said a company spokesman last month: "Sales are strong anyway, so it is difficult because of the boom to calculate the effect of the amnesty offer. But we are sure it is having some effect."

In early March Astrogamma announced it had been acquired by a group of new investors, who've been running the firm since last June. Out of the picture is Peter Cyrus, founder and former sole proprietor. The new team at the helm will aggressively invest in systems that will link FENICS to more data bases and facilitate reconciliations with back office risk management systems-and they'll also try further moves to clear the software seas of pirates.

Capital Access, market researchers, surveyed 481 investment firms and found that two thirds use derivatives in some fashion. It said last month that 23 percent expect to increase their derivatives use this year, versus 14 percent who are decreasing. Bank portfolio departments and mutual funds were the heaviest users, while investment managers and trust departments were less involved. A significant 73 percent of the sample use derivatives for investment purposes, and only 27 percent for balance sheet/risk management.

"Despite the maligned image associated with the much-publicized corporate and municipal derivatives disasters, our survey results show that derivatives are not being used for speculative purposes," explains David D. Farrington, chairman of Capital Access.

A slightly less rosy picture comes from Greenwich Associates' survey of corporate usage in 1995, which found a decline of nearly a quarter in the number of users over 1994. The remaining users were split roughly 50/50 between those who increased or decreased their derivative portfolios, according to 529 treasury executives. Some 40 of the most active users, less than 10 percent of the total, accounted for more than 65 percent of the volume. But even if a significant number of treasurers stuck their heads in the sand, overall volume nonetheless was up 15 percent according to Greenwich data. The survey firm also forecast a sunny 1996, predicting steady demand for interest rate swaps, options, caps, collars and floors-as well as for listed exchange products.