Credit Futures May Hit Exchanges By Year End

Chicago's futures exchanges are aiming to move over-the-counter credit derivatives index trading on to the exchange late this year and have set a joint-working group to steer the project.

  • 04 Feb 2005
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Chicago's futures exchanges are aiming to move over-the-counter credit derivatives index trading on to the exchange late this year and have set a joint-working group to steer the project.

Gene Mueller, a managing director of business development in the Chicago Board of Trade's interest rates products division, said CBOT and the Chicago Mercantile Exchange, which have been in talks with the CDX consortium since the summer, have proposed a working group to establish global rules that constitute the index, such as minimum credit requirements. The working group would comprise of officials from the CBOT, CME and consortium members. Anita Liskey, the CME's spokeswoman in Chicago, declined comment.

The exchanges will jointly determine which of the two exchanges is best suited to carry the credit index futures based on a variety of factors, such as how the product is priced and structured, according to Mueller. He added the two have worked together before, citing the 2003 CME-CBOT Common Clearing Link as an example.

Talks about listing credit index products begun in the summer, but the CDX consortium was stalled while it negotiated its marketing services agreement with Dow Jones. That agreement was signed last week and, "We're now in a position to get in an active discussion with [the consortium]," Mueller said. "We're ready to formalize it and get going," he added. Mueller hopes the working group will get underway by next quarter.

One official predicted the transition will get stuck on determining how to use OTC contracts on a futures exchange, particularly in regards to counterparty risk. But Mueller said it's not hard to construct a futures contract based on an OTC product. He said the bigger challenge lies in ensuring non-contestable prices for settlement, a problem the group will work to resolve.

The demand for credit index futures has jumped with the emergence of credit hedge funds because these are much shorter-term trading institutions than traditional credit derivatives users, such as insurance companies and bank loan portfolios. In addition, Mueller thinks new players will start using credit derivatives to better manage risk by hedging their positions once the listed instruments are introduced.

  • 04 Feb 2005

All International Bonds

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3 Bank of America Merrill Lynch 221,389.46 762 7.78%
4 Goldman Sachs 171,499.26 554 6.03%
5 Barclays 169,046.60 646 5.94%

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1 HSBC 25,935.16 104 7.16%
2 Deutsche Bank 25,125.19 81 6.94%
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4 BNP Paribas 19,315.94 110 5.34%
5 Credit Agricole CIB 18,706.93 106 5.17%

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Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 12,578.87 55 8.17%
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4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%