The CBOE Futures Exchange (CFE) is to launch futures trading on the CBOE/CBOT 10-year US Treasury Note Volatility Index on 13 November.
Futures on the VXTYN Index offer customers a way to hedge pure interest rate volatility risk based on US government debt with a single product for the first time. The VXTYN Index, on which futures on VXTYN are based, is calculated by applying the CBOE Volatility Index (VIX Index) methodology to futures options data from CME Group's 10-year US Treasury note contract – one of CME Group's most actively traded interest rate options products.
"The market for interest rate derivatives, by far the largest asset class in the over-the-counter market, is estimated to be 40 times the size of the equity market in terms of notional value outstanding. We're excited to tap into this space for the first time with a product that will enable customers to better manage interest rate volatility risk," says CBOE CEO Edward T Tilly. "Leading up to the launch of VXTYN futures, we have worked closely with – and received encouraging feedback from – market participants most likely to trade VXTYN futures. We are also encouraged by the interest we're seeing among ETP issuers, as well as from European and Asian customers who have exposure to US interest rates, either directly or indirectly."
Potential users of VXTYN futures could include mortgage-backed securities investors and other large credit managers seeking to hedge against adverse interest rate movements; large bond funds that are naturally long interest rate volatility and are seeking a yield-enhancing mechanism; and hedge funds, volatility arbitrage firms and global macro participants seeking to express their views on forthcoming monetary policy events or to capture mispricing anomalies between cross-asset volatility (e.g. fixed income versus equity volatility).
Three Lead Market Makers (LMMs) have been appointed to make markets in VXTYN futures when the contract launches.
"We are very pleased to have this strong commitment from these firms early on," Tilly says.
In May 2013, CBOE began calculating and disseminating VXTYN Index values as part of an agreement between CBOE and CME Group.
