Derivative houses in Australia including ABN AMRO and Macquarie Bank are looking to establish an interbank market for inflation-linked derivatives, potentially within the next year. "I certainly believe that the inflation outlook has shifted globally and [inflation is] becoming much more topical," said Franciso Sarmiento, associate director in structured trading and derivatives at Macquarie, noting that the potential for increased inflation worldwide is on the radar screen for a growing number of end users.
While one-off inflation-linked derivative deals have been around for a few years in Australia, the desire for a deeper market has surfaced. Last year an Australian Financial Markets Association's swap committee was given the mandate to push for the development of inflation-linked products and bring out standardized definitions for consumer price index-linked swaps. At the start of the year, the domestic market adopted the definitions for trade documents. The working group is likely to meet in the next few months to discuss ways to increase the profile of the products. "A lot of the hard work has already been done--it's becoming a matter of saying 'Let's go' and setting up broker screens," said Lloyd Alty, associate director in the interest rate trading group at ABN in Sydney.
Alty noted that within two years of the launch of an inter-dealer market, the derivatives could rival the size of the domestic inflation-linked bond market which has an estimated annual turnover of AUD1 billion (USD745 million).
The next step, according to dealers, is to push for greater end user education and use, which will likely begin with a more corporate bonds linked to inflation. "We'll see more transactions in the next 12 months, and following that I expect to see interbank trading," said Sarmiento.