A report commissioned by Euronext Liffe has found that its recently launched bond index contracts address fundamental problems in the European market, 8 years after Liffe lost the Bund to Eurex.
The London exchange, however, faces an uphill battle to build liquidity in the face of its arch rival's now established and super-liquid suite of Bund, Bobl and Schatz futures.
The issue is one of managing basis and liquidity risk, so while bond contracts based on indices might more accurately address traders' needs, they face significant liquidity risk in moving from a highly developed market to a nascent one.
"A trader needs to cope with both basis risk and liquidity risk. While a bond index contract in theory may have a lower basis risk, [Euronext] Liffe's product in practice has a significantly higher liquidity risk due to the...