The International Swaps and Derivatives Association is planning to write the first standard documents for inflation derivatives, according to Bob Pickel, ceo of ISDA in New York. The instruments have been on the association's radar screen since the 2002 annual general meeting. At that meeting Frederic Janbon, ISDA board member, said this was one of the hottest markets. That prediction has proved true, with outstanding inflation-linked debt standing at around USD70 billion.
"This is now one of the important markets," said Thomas Roeder, head of rates at Dresdner Kleinwort Wasserstein in Frankfurt, who also sung their praises at the conference in 2002. Roeder said French government issuance, and planned issues by other governments including Italy and Germany, has made this a highly liquid market in one through 15-year trades. Guillaume Amblard, head of options, inflation and exotic trading at BNP in London, said the market has grown fourfold in the last two years.
Amblard said a standard ISDA document would boost liquidity and lead to tighter bid/offer spreads. In addition, it will encourage more clients to participate as they will feel more at ease trading on a standard ISDA template, noted Volker Wellmann, inflation trader at BNP in London. He added that the fallback mechanisms, which provide a means of addressing material changes to a market, the sourcing of data and the move to non-revisable indices are the three areas that need standardizing. It is also important to link the derivatives to the underlying inflation-linked bonds.
