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Strategies & Market Trends : The Final Frontier - Online Remote Trading

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From: TFF	3/8/2007 5:50:47 PM
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Merc to offer futures on credit-default index (Crain’s) — The Chicago Mercantile Exchange changed tack on its bid to enter the $26-trillion credit-default swap market, the fastest-growing part of the credit derivatives market, as it gears up to compete with some of its biggest customers. On April 23, the exchange plans to start trading contracts whose value fluctuates with the likelihood of bankruptcy at any of a group of companies, rather than at individual companies as previously planned, according to a 43-page application for approval of the contracts filed Wednesday with the Commodity Futures Trading Commission. The contracts, tied to an index of the bonds of 32 companies, would allow investors to guard against defaults or a company’s failure to pay interest on the debt. They would be the first such contracts offered on a U.S. exchange and are modeled on credit-default swap indexes traded in the over-the-counter market, where they are marketed by some of CME’s biggest customers, including Goldman Sachs Group Inc. and J. P. Morgan Chase & Co. Trading in credit-default swaps grew by more than 50% in the first half of 2006, according to the International Swaps and Derivatives Assn. in New York. The CME’s original plan was to offer contracts that would pay out if a particular company went bankrupt. That would have put it in direct competition with the Chicago Board Options Exchange, which planned to offer similar contracts. The CBOE argued to futures regulators that the CME’s contracts would not come under the regulators' jurisdiction as they were structured. The CME responded by narrowing the terms under which the contracts would pay out. The CBOE’s plan to list its own options that pay out when specific companies go bankrupt is under review at the Securities and Exchange Commission. A CBOE spokeswoman wasn’t immediately available to comment. The latest change in strategy stems from the CME’s expectation that liquidity will be easier to develop in a contract tied to an index rather than to individual companies, a spokeswoman says. Any decision to launch contracts tied to individual companies will wait until after it’s clear how the market responds to the CME’s index, she said.

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