CME targets credit derivatives market

The Chicago Mercantile Exchange plans to launch credit derivatives products early next year, with a view to capturing a share of a market that has largely been the preserve of over-the-counter dealers.

The CME has filed an application with the US Commodity Futures Trading Commission (CFTC) to list credit event futures, which are triggered by the same events as standard credit default swaps.

The products will use guidelines laid down by the International Swaps and Derivatives Association.

The CME is eager to obtain a slice of a market that has more than doubled in the year to June 2006 to reach $26 trillion in notional outstanding, according to Isda statistics. Frankfurt-based Eurex – which will lose its status as the world’s biggest derivatives exchange if the CME’s merger with the Chicago Board of Trade is approved – also hopes to launch an offering next year based upon an index of the most heavily traded OTC European credit derivatives.

The CME is focusing on individual corporations such as media group Tribune, retailer Safeway and homebuilder Centex. CME Credit Event Futures will operate in the same way as other cash settled futures contracts and will have a five-year term.

The CME announced plans for an $8 billion takeover of Chicago-based rival CBOT earlier this month, in a move the exchanges anticipate will generate cost savings of $125 million (see: CME and CBOT to merge).