NYSE Seen Facing Tough Battle To Unsettle CME Rate Futures
April 11 2012 - 4:30PM
Dow Jones News
NYSE Euronext (NYX) may face a tough battle to gain traction
with a new suite of short-term interest rate contracts, according
to some market participants.
The exchange's U.S. futures arm this week announced the products
will be launched in July, extending a three-way battle to control a
rate-futures market dominated by CME Group Inc. (CME) at a time
when trading volumes are sliding.
NYSE Liffe U.S. also hopes to lure market participants who don't
trust methods used to calculate the benchmark rate tied to
traditional Eurodollar futures contracts.
Pending regulatory approval, NYSE Liffe U.S. plans a July 16
start up for futures tied to the $400 billion daily repurchase or
repo market that helps banks finance Treasury-bond trading.
Contracts will track the Depository Trust and Clearing
Corporation's General Collateral Finance Repo Index. The index
calculates the average interest rate paid each day for "general
collateral" repurchase agreements on U.S. Treasury, agency, and
agency mortgage-backed securities.
NYSE Liffe's repo contracts seek to lure Eurodollar-futures
participants who track the three-month London Interbank Offered
Rate, or Libor, which is considered a benchmark for floating rate
lending.
For more than a year, regulators and law-enforcement officials
in the U.S., Europe and Japan have investigated allegations some
traders and bank employees may have manipulated interbank
rates.
Last month, the British Bankers Association, which oversees
daily Libor settings, assigned a steering group made up of several
major U.K. banks to review rate-setting methods and develop a code
of conduct.
NYSE Liffe's trading alternative offers "a new and more reliable
short-term interest rate benchmark for market participants to
precisely hedge critical business risks," the exchange said in a
news release.
The Libor may be viewed as unreliable, but Eurodollar futures
trading volumes are "still massive," said Ira Jersey, a rate
strategist at Credit Suisse.
CME reported average daily Eurodollar futures volume at two
million contracts in the first quarter, down 19% from the same time
a year ago, but 25% more than the fourth quarter of last year.
CME launched Eurodollar futures in 1981. The market reflects
expectations for changes in the three-month Libor, which is what
banks charge each other to borrow U.S. dollars.
NYSE Liffe U.S. and bank-supported platform ELX Futures LP also
list Eurodollar futures, but CME raked in 97% to 98% of trading
volumes in March, according to data compiled by Raymond James
Financial Inc. (RJF).
It will be difficult for NYSE Liffe's repo futures to gain
traction in the near-term, said Jersey, but the product "may have
merit" for the wide-range of traders looking to manage their risk
on future funding.
Potential players are mutual or hedge funds, asset managers,
insurance companies, in addition to banks and dealers, said
Jersey.
NYSE Liffe U.S. plans a seminar in Chicago later this month to
lure market participants.
"I want to at least know what's they're doing," said Lawrence
Morgan, senior account executive for the futures brokerage firm
Archer Financial Services.
For now, Morgan said he would "bet against" the exchange pulling
activity away from Eurodollar futures.
-By Howard Packowitz, Dow Jones Newswires; 312 750 4132;
howard.packowitz@dowjones.com
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