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To: IngotWeTrust who wrote (17342)	9/3/1998 10:03:00 AM
From: Alex	Read Replies (2) \| Respond to of 116762

Liffe Hopes New Euro Swap Future Will Compete with German Bond Contract Based on the Difference Between Fixed and Floating Rates for the Euro The London International Financial Futures and Options Exchange yesterday unveiled plans for a new contract that it hopes will topple the German government bond future as Europe's benchmark derivative after monetary union. The contract will be based on the underlying swap rate between 10-year fixed rate and floating rate money in the future single currency, the euro. "We think that a single issuer bond contract will be too narrow to be a benchmark after European monetary union," said Guy Simpkin, head of product development at Liffe. Liffe lost majority market share in the 10-year German bund future last year to the Frankfurt-based Deutsche Terminb”rse. There are currently worries about a liquidity squeeze in the German bund market as investors flee high-risk emerging markets. Trading in the German bund future on the DTB has soared in the last few days, prompting fears that there may not be enough cash bonds in the market to cope with the increased volumes in the derivatives market. Investors in the bund future have the option of converting the contract into the underlying cash bond when the derivatives contract expires, and more than usual are likely to want to do so when the September bund future expires next Tuesday. The launch of the euro-denominated swaps contract, on October 15, also means that Liffe will be encroaching on the over-the-counter swaps market which is dominated by banks. Until now, a swap has always been an OTC (as opposed to an exchange-listed) contract because it is agreed between two private counterparties in a bilateral contract. Liffe hopes that banks will see its new contract as a means of hedging their exposure to their fixed and floating rate positions rather than as a competing contract that will take business away from them. Volumes in the swaps market have soared in the last five years as banks have moved into new financial territory to generate alternative sources of fee income. The reduction in inflation in the US and Europe and the corresponding reduction in the volatility of movements in interest rates has made it easier for banks to swap longer-term fixed interest money into floating rate paper. As a result it has become possible to build a liquid and price-sensitive yield curve of up to 30 years in the swaps market - which is essential if it is to achieve benchmark status. But many investment bankers yesterday said they were unconvinced the swaps contract would replace the German government bond future as the main benchmark in the future single currency. "In the US, the Treasury bond is still the main benchmark," said one trader. "Why should it be any different in Europe?" Problems could also arise from the fact that the price of the contract - known as LiborFinancedBond - will be based on the London Interbank Offered Rate, the rate at which banks lend to each other rather than on Euribor, a competing reference rate for the future single currency recently launched in Brussels. The Financial Times, September 3, 1998