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Capital Markets

Debt Market round-up: LIFFE’s long shot

Euronext.liffe makes an attempt to regain a foothold in derivative futures trading at the long end of the European bond curve this month when it launches a new range of bond futures based on the whole eurozone and the largest eurozone countries – Germany, France and Italy.

Unlike a classic bond future, which entails physical delivery of an underlying at the settlement date, the products Euronext.liffe has created include several total return futures contracts based on the EuroMTS government bond indices.

Dealer-to-customer cash bond trading in the government sector is dominated by EuroMTS, so if the futures contracts attracted liquidity they could provide a powerful hedging or speculative tool for dealers and other market participants.

However, eurozone bond futures liquidity currently resides with the Eurex Bund contract. It is used by all market participants that want to trade the long-end of the euro interest rate curve. Attracting liquidity off one exchange to another has been all but impossible in recent years, although those with longer memories will recall that Liffe once dominated all futures trading in Europe but effectively lost the Bund contract to Eurex just under 10 years ago when the latter embraced electronic trading first.

For many years, some in the non-German eurozone bond trading community have complained that the Bund future is inadequate for their needs. Now it appears that their prayers have been answered. Furthermore, a total return futures index also addresses typical problems around futures trading such as squeezes of the cheapest-to-deliver bond.

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