CBOE Futures Exchange plans to launch futures trading on the CBOE/CBOT 10-year US Treasury Note Volatility Index (VXTYN) beginning on 13 November, pending regulatory review.
CBOE chief executive Edward Tilly made the announcement during his address to attendees at the CBOE Risk Management Conference Europe, currently taking place outside of Dublin.
The VXTYN Index, on which futures on VXTYN is 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 active interest rate options products. In May 2013, CBOE began disseminating values on the VXTYN Index as part of an agreement between CBOE and CME Group.
"Interest rate derivatives represent the largest asset class, by far, in the over-the-counter market, outweighing the equity derivatives market by many multiples," Tilly says. "We are pleased to tap into this space by introducing a CBOE Volatility Index futures product that offers customers a way to hedge pure interest rate volatility risk based on US government debt with a single product for the first time.
"The addition of futures on the CBOE/CBOT 10-year US Treasury Note Volatility Index brings a new dimension to our extensive list of volatility-related products. We see a significant, untapped opportunity to continue to grow our volatility trading with existing customers as well as with a new group of professionals across multiple sectors in the fixed income arena."
Potential users of futures on VXTYN 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).