USFE to trade government agency debt futures

The exposure will initially be listed through a government tranche of the CDX index, which already has exposure to agency debt.

The product will be the first exchange-traded futures contract referencing credit default swaps (CDS) on the federal mortgage guarantee companies, Fannie Mae and Freddie Mac.

The USFE said in a statement released yesterday it had worked with David Boberski, head of interest rate strategy at Bear Stearns in New York, to design the CDS futures.

The futures reference the two agencies because, like the exchange, they are regulated by the Commodity Futures Trading Commission and not the Securities and Exchange Commission, which prohibits futures on registered securities like corporate bonds.

According to a research note written by Boberski, the futures will be offered in both funded and unfunded formats, listed by the exchange as two separate indexes.

The unfunded format will reference pure Fannie Mae and Freddie Mac cashflows, designed to appeal to traders looking to make credit spread trades.

The funded format, however, will bundle an interest rate swap in with the CDS, and more accurately replicates an agency holding. In that case, the trader is likely to be a more traditional agency investor looking to build up synthetic exposure.

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