Barclays Capital, Ixis Corporate and Investment Bank, Lehman Brothers, Nomura International and the Royal Bank of Scotland have all agreed to become market-makers for the Chicago Mercantile Exchange’s (CME) new eurozone inflation futures contract. The contract, based on the harmonised index of consumer prices (HICP), is set for launch on September 19.It’s the exchange’s second stab at an exchange-traded inflation futures product following the launch of a US contract in February 2004. Critics argue that contract exposes users to seasonal inflation volatility because of its use of the quarterly US consumer price index (CPI) measure. They also argue that the exchange should have got more than just one market-maker – Barclays Capital – on board before launching the contract.
The CME appears to have responded to these criticisms, both by adopting the annual HICP index as the reference for the futures and by getting five investment banks to commit to providing liquidity ahead of launch.
Robin Ross, managing director of CME interest rate products, said the eurozone inflation swap market “currently lacks short-term, inflation-linked instruments. Our market-makers will help build and maintain liquidity, ensuring that end users can leverage the hedging benefits this new contract brings to the global market”.
The CME HICP futures will represent inflation on a notional value of €1 million for 12 calendar months. As with CME Eurodollar futures contracts, they will be quoted as 100 minus the annual inflation rate in the 12-month period proceeding the contract month.
“The new HICP futures will provide a much needed market for trading short-term inflation expectations,” said Borut Miklavcic, Lehman Brothers’ head of European inflation trading. “The instrument will not only enable derivative users to hedge fixings risk, but will also allow for trading forwards on European inflation-linked bonds and could kick-start trading in inflation-linked bond options.”
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