Swapnote’s flying start
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.