On March 20, the London financial futures and options
exchange, Liffe, introduced a new product called Swapnote. This
swap futures contract, the first of its kind, is referenced against
the European interbank swap curve instead of the government bond
curve. This means that it more accurately reflects the exposures
that bondholders experience. It is available at two-, five- and
10-year maturities.
The credit ratings of most banks are between AA and A+, which is
more similar to corporate credits than to government credit
ratings.
Until now, swaps traders have had to hedge their exposures using
government bond futures, which do not reflect the underlying risk
accurately. Because Swapnote is referenced to the interbank swap
curve, it correlates more to corporate credit risk exposure.
The creation of a single European currency has removed the
benchmark status of government bond yield curves. As a result,
there is no homogenous European government...
