JPMorgan Chase & Co. and the banks responsible for 90 percent of credit-default swaps aren’t trading the first listed credit derivatives.
Every major securities firm except Societe Generale SA has declined to buy and sell the contracts in the first week they traded. The International Swaps and Derivatives Association, which represents 750 banks and securities firms, says it’s concerned the contracts will “adversely” influence bond prices.
“The contracts are flawed,” said Guy America, JPMorgan’s European head of credit trading in London. “It’s my understanding that one in 20 futures contracts are successful and this may become one of the 19.”
Eurex, the world’s biggest futures exchange, is meeting resistance as it enters a market that about doubled every year since banks invented it a decade ago. Investors are using credit derivatives as an alternative to bonds because they are cheaper and easier to trade. They now own contracts based on at least $26 trillion of debt, according to data compiled by ISDA.
Eurex reported 31.6 million euros ($42.1 million) of trades in its credit-default swap contracts since listing them on March 27. An average 15 billion euros of credit-default swaps are bought and sold daily in the over-the-counter market.
The exchange is one of at least four planning to offer listed contracts for credit derivatives, contracts designed to protect bondholders against defaults. Buyers of the contracts receive the face value of defaulted debt in return for handing over the bonds or the cash equivalent.