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Derivatives

Dealers Play Down Chicago Credit Futures Threat

OTC dealers claim demand will hold strong in the face of the Chicago Mercantile Exchange's plans to roll out credit-event futures in the New Year.

OTC dealers claim demand will hold strong in the face of the Chicago Mercantile Exchange's plans to roll out credit-event futures in the New Year. In a straw poll last week by DW, dealers said OTC will continue to dominate credit-default swaps trading. They argued flow will be supported by imbalances in supply and demand for credit protection, which can result in sudden, sharp increases in the spread between bid and asked prices quoted by dealers. "Inefficiency is also important to this market," noted one dealer.

Many conceded, however, that commercial banks hedging loan portfolios may migrate to an exchange format for efficiency and accounting reasons. The CME futures will also be cleared and guaranteed by the CME Clearing House, a plus for end users concerned with counterparty risk. Commercial banks make up the largest group of credit end users, selling 38% and buying 51% of all written protection, according to a British Banker's Association report.

Market participants noted that variations on existing CDS indices, in addition to single names with the most liquidity, have the most potential to move to trading on a listed exchange within the next couple of years.

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