NYSE Seen Facing Tough Battle To Unsettle CME Rate Futures

Date : 04/11/2012 @ 4:30PM
Source : Dow Jones News
Stock : ICAP (IAP)
Quote : 469.7  0.0 (0.00%) @ 2:30AM
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NYSE Seen Facing Tough Battle To Unsettle CME Rate Futures

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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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