MEFF Launches New European Debt Contract

On July 1, MEFF Renta Fija will launch the first futures and options contracts on European Government Debt, with innovative characteristics designed for the Euro-zone. The new contracts, called DEBS, enable better risk management for investors trading debt of the distinct European countries. The DEBS contracts are based on a Bond Basket comprised of government debt from four European countries, in the following proportion: 30% German debt, 30% French debt, 20% Italian debt and 20% Spanish debt. The basket contains the most liquid issues at the upper end of the 10-year section of the yield curve for each of the four countries. This composition takes into account the GDP of the respective countries as well as the similar country risk of France and Germany on the one hand and Italy and Spain on the other. The new DEBS contracts facilitate risk management for European debt, providing new opportunities for arbitrage trading between the cash market and the futures market. Similarly, the Bond Basket could be used in spread trades against futures contracts of countries outside of the Euro-zone, such as the Gilt in the United Kingdom. The DEBS will function as a pan-European debt index, automatically reflecting any significant variation that occurs in the debt instruments that make up the basket. On expiry the contracts will be settled by delivery of the underlying debt, being the highly liquid benchmark issues. The design of the contracts effectively eliminates the risk of a squeeze (risk of concentration on a single underlying bond with insufficient liquidity), a complaint with the Bund contract. The contracts will trade on MEFF Renta Fija's electronic system. Thanks to the interconnection of the Euro-GLOBEX trading platforms, members of MATIF, MIF and BDP will have access to these contracts.