NYSE Liffe U.S. Begins to Trade in Futures on DTCC Repo Index

July 16 (Bloomberg) -- NYSE Liffe U.S. began trading in futures contracts based on the Depository Trust & Clearing Corp. repurchase agreement indexes to enhance dealers ability to hedge short-term interest rates.

The futures contracts, which began today, track movements in the $400 billion market for general collateral finance repurchase agreements using three DTCC GCF Repo indices. Changes in repo rates affect dealers financing costs, which use them to finance debt holdings as well as to increase leverage.

The scandal impairing confidence in the London interbank offered rate, a benchmark for $360 trillion in securities, may help drive demand for the futures. Libor’s reputation has been dented by Barclays Plc’s admission that it submitted false Libor rates. Other banks have lowballed submissions, according to testimony before British lawmakers this month week from Robert Diamond, who resigned as chief executive officer after Barclays was fined 290 million pounds ($451 million) in the scandal.

“The new repo futures will be met with strong interest,” Brian Smedley, a strategist in New York at Bank of America Corp., said in a telephone interview on July 9. “It will be attractive for both those who need funding, like hedge funds or dealers, and want to hedge as well as from investors. Repo is certainly one of the most important money market rates.”

In a repurchase, or repo, agreement, U.S. government securities are exchanged for cash, with the debt held as collateral for the loan. Dealers agree to repurchase the securities at a later date and cash is sent back to the lender.

General Collateral

The average rate for borrowing and lending Treasuries for one day through repurchase, or repo, agreements, climbed to a 22-month high of 0.297 percent July 2, up from minus 0.001 percent on Dec. 30, the DTCC index shows. The measure was 0.207 percent on July 13.

In a general collateral repo transaction, the lender of funds is willing to accept a variety of Treasury, mortgage-backed securities or agency collateral.

The NYSE Liffe U.S., a unit of NYSE Euronext, is listing 30-day contracts for 24 consecutive months based on DTCC’s repo index for Treasuries, agencies and agency MBS. The New York-based DTCC’s Fixed Income Clearing Corporation processes more than $3 trillion in repos each day.

GCF repo, a fraction of the $5.5 trillion repo market, was introduced in 1998 by DTCC’s Fixed Income Clearing Corp. unit with JPMorgan Chase & Co. and Bank of New York Mellon Corp., the clearing banks that function as the agent and collateral holder in tri-party repo transactions.

Eurodollar Futures

Trading in the repo futures may reach 500,000 contracts a day, Citigroup Inc. analysts Neela Gollapudi and Timothy Chung wrote in a July 6 note to clients. “We would not be surprised if it takes several quarters to several years” to get to that level, they said.

In March 2011, the NYSE Liffe U.S. began offering futures trading for Eurodollar contracts, as part of an overall effort to take on CME Group Inc., the world’s largest futures exchange. Eurodollar futures have historically been one of CME Group’s most-traded interest-rate products.

CME Group Inc. still has the most-popular interest-rate future in the Eurodollar, even as trading volume in the first quarter fell 19.2 percent from a year earlier, according to statistics compiled by the Futures Industry Association, an industry trade and lobbying group. The contract tracks interest-rate movements over three months and settles against Libor.

To contact the reporter on this story: Liz McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net