Cboe Unveils Hedge for Corporate Bond Risk

The new index futures are "expected to provide liquid hedging vehicles for institutional investors with exposure to U.S. corporate debt."
Matthew HellerMay 17, 2018

U.S. derivatives exchange Cboe Global Markets is teaming up with asset manager BlackRock to offer new futures contracts to mitigate credit risk in the corporate bond market.

Credit default swap volumes were once seen as the primary vehicle to hedge corporate bond exposures. But according to The Financial Times, trading in swaps has declined since the financial crisis, with some investors turning to exchange traded funds.

“Derivatives, such as a futures contract, have the benefit of only requiring a small amount of ‘margin’ to be posted when entering into the trade, rather than coughing up the full value of the transaction,” the FT said.

Cboe said its new U.S. corporate bond index futures are “designed to reflect the performance of the broad U.S. high yield and investment grade bond markets” and are expected to provide liquid hedging vehicles for institutional investors with exposure to U.S. corporate debt.”

The exchange is working with BlackRock and data provider IHS Markit to list two contracts this summer pending approval by the Commodity Futures Trading Commission, one for high yield bonds and one for higher-rated, investment grade debt.

“These index futures are a quantum leap forward towards better bond markets,” Martin Small, head of U.S. iShares at BlackRock, said in a news release. “A growing ecosystem of market access vehicles, chiefly bond ETFs and bond index futures, are a critical step towards improving the price transparency and liquidity of corporate bond markets.”

U.S. treasury futures and stock market futures are frequently traded but there is no such product for the corporate bond market. Intercontinental Exchange launched credit futures in 2013 based on credit defaults swaps but the contract failed to gain significant traction.

The Cboe futures contracts will track the performance of the IHS Markit iBoxx indices that underpin BlackRock’s high yield and investment grade bond exchange traded funds.