New York: The Chicago Mercantile Exchange (MERC) got approval to begin trading credit derivatives from the US Commodity Futures Trading Commission (CFTC).
CFTC approved the plan to trade a futures contract that investors can use to bet on the creditworthiness of companies, according to a letter the regulator sent the exchange on Tuesday. The futures are modelled after credit-default swaps, the privately negotiated contracts used by hedge funds and others to speculate on the ability of companies to repay their debt.
A date to begin trading the contracts has yet to be set, MERC spokeswoman Pamela Plehn said. MERC and rival exchanges want to tap a market, which, in over-the-counter trading last year, more than doubled to cover $34.5 trillion (Rs1,414.5 trillion) in debt securities. The Chicago Board of Trade, which MERC is bidding to acquire, last week said it will start trading its own index linked to the credit-default swap market on 25 June. The Chicago Board Options Exchange (CBOE) plans to start offering credit derivatives as early as this month.
The US Futures Exchange, said that by the end of the year, it will offer a contract linked to the debt issued by Fannie Mae and Freddie Mac, the largest sources of money for US home loans. Frankfurt-based Eurex AG, the world’s biggest futures exchange, became the first exchange to offer credit derivatives in March.
MERC’s plans had been tripped up by arguments from CBOE that the futures contract is actually a security that isn’t permitted under the US Commodity Exchange Act.
In a letter on Tuesday to John Labuszewski, managing director of research and product development at MERC, CFTC ruled otherwise.
Credit-default swaps were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities, should the company fail to adhere to its debt agreements. The market has become the best gauge of shifts in credit quality, with contracts now covering more than 3,000 companies, governments and industries. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.