Eurex, the international derivatives exchange, will launch the world’s first exchange traded credit derivatives contract on 27 March 2007, a future based on the iTraxx® Europe 5 year index series. The iTraxx® Europe index is an equally weighted portfolio of the 125 most liquid European investment grade credit default swap (CDS) entities and is provided by International Index Company Ltd. (IIC). Credit derivatives offer market participants the opportunity to hedge against credit events such as corporate defaults, failure to pay or restructuring. With credit derivatives Eurex expands the breadth of its product portfolio and participates in a fast growing asset class in the global market.
In addition, dependent on market demand and sufficient market maker support, Eurex will list futures contracts on the iTraxx® HiVol and iTraxx® Crossover indices, either simultaneously to the above mentioned launch date or soon after. The iTraxx® HiVol index is an equally weighted portfolio of the 30 entities with the highest spread from the iTraxx® Europe index. The iTraxx® Crossover index is an equally weighted portfolio of 45 European sub-investment grade entities.
The Eurex iTraxx® credit futures will closely mimic the risk structure of credit default swaps traded in the over the counter (OTC) market. Trading on Eurex will involve Eurex Clearing as central counterparty thereby reducing the counterparty and systemic risk and adding to the benefits the product will offer to users. The contract will be based on the 5 year series, with a fixed coupon and semi annual maturity dates in March and September. The contract size is EUR 100,000; the tick size is set at 0.005 percent translating into 5 euros per tick. It will be quoted in percent with three decimal places. The product will be cash settled, with reference to the iTraxx® index values of IIC. In the case of a credit event, cash settlement of the single name entity will be made with reference to the ISDA CDS protocol. The Eurex iTraxx® Europe futures contract will be supported by designated market makers, ensuring liquidity from launch.
Eurex CEO Andreas Preuss said: “An exchange-traded credit derivatives contract is the next logical step in the development of the global credit market and with this product Eurex further expands its derivative product offering into a new asset class. We have worked very closely with market participants to develop this innovation and we believe we have a product that is best tailored to the market’s needs. The Eurex iTraxx® Europe future will offer our customers tremendous opportunities to manage their credit risk at lowest cost and further increase transparency and liquidity in the market.”
The global credit derivatives market has been growing exponentially over the last ten years, increasing from approximately USD 1 trillion in 1996 to more than USD 20 trillion in 2006. The main driver of this growth is the increasing need for standardized products among the growing number of participants. CDS indices saw the strongest growth of all credit derivatives, reaching a market share of about one third in 2006. Listing credit derivatives will improve operational efficiency and risk management for existing credit market participants and facilitate entry into the market of participants that may currently be restricted from trading these products OTC or that are familiar with exchange-traded futures contracts.
