NYSE Sees Fall Expansion Of US Interest-Rate Derivatives Market

NYSE Euronext (NYX) plans to introduce a slate of new interest-rate derivatives in the fall, expanding its challenge to the long-term dominance of CME Group Inc. (CME).

The Big Board operator aims to expand its share of the key Eurodollars futures market to 10% over the next year, having captured 3% since entering the market last month, said Tom Callahan, chief executive of its NYSE Liffe U.S. unit.

Alongside plans to debut options and other new contracts later this year, the push also highlights the strategy of expanding focus away from equities in the face of the effort led by Nasdaq OMX Group Inc. (NDAQ) to break up the company and sell its nascent futures and over-the-counter operations to IntercontinentalExchange Inc. (ICE).

"The core mission is first to establish ourselves as a viable competitor to CME," Callahan said in an interview.

NYSE Euronext in March launched a long-planned clearinghouse facility, developed with the Depository Trust & Clearing Corp., that lets investors group collateral for their fixed-income futures trading alongside margin put up against trades in Treasurys, repurchase agreements and other government issues handled by DTCC's Fixed Income Clearing Corp.

About 30 clients have connected to the market and an average 76,000 Eurodollar futures contracts changed hands last week. An average 2.6 million Eurodollar contracts were traded last week at CME, developer of the market, which lets investors hedge movements in inter-bank lending rates.

In the third quarter Callahan said NYSE Liffe intends to introduce an electronic market for trading options on Eurodollar futures, which at CME can account for one-fifth to one-third of all Eurodollar derivatives trading activity with hundreds of thousands of contracts bought and sold per day.

"It's another place where no one has yet attacked CME," said Callahan.

Futures on repos and other fixed-income products handled by the FICC facility may also be introduced around the same time, he said.

The NYSE venture, supported by a group of banks and trading firms, is the latest in a line of platforms challenging CME's supremacy in fixed-income futures trade. ELX Futures LP, another consortium-backed effort launched in 2009, has wrangled an approximate 2.7% market share in Treasury futures for the first quarter of 2011.

NYSE Liffe U.S.'s volume in futures tied to Treasury yields remains low at a few thousand contracts per day. Callahan said a ramp-up in activity is likely to be slower for those contracts because when the futures expire, they deliver to the holder cash Treasury note positions, which then are matched up against customers' existing Treasury holdings.

The process is new and traders want to see how it performs in a few quarterly expiration periods, he said.

Callahan this week traveled to meet customers in Europe, some of whom already are active in the new contracts. He estimated that 15% to 20% of trading each day in NYSE Liffe U.S. interest-rate futures markets occurs before the traditional start of the session at 8:20 a.m. ET.

Eurodollar futures, debuted by CME in 1981, are linked to the London interbank offered rate, which banks charge one another to borrow U.S. dollars. The three-month U.S. dollar Libor is regarded as a global benchmark for floating rate lending and a key gauge of credit market sentiment.

Nearly 511 million eurodollar futures changed hands at CME in 2010, ranking it among the five most heavily traded futures contracts globally, according to data compiled by the Futures Industry Association.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com.

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