An elegant and intellectual proposal, but will it fly? That's what swap dealers and analysts in London are asking themselves after a week of presentations in mid-May, by Liffe (the London International Financial Futures & Options Exchange) and its associates, of a revolutionary future based on swap rates.
Called the Liffe Libor financed bond (LFB), the contract would allow traders and investors to roll over or cash-settle the cashflows of a hypothetical bond discounted to net present value at euro swap rates. It would remove among other things the hassle of reckoning potential credit exposures.
The idea was brought to Liffe by broker-dealer Adams Viner & Mosler (AVM) of Florida whose quantitative analysts have been "kicking the notion around for two years", says AVM chief operating officer Bill McCauley. Liffe clearly leapt at a proposal that has a chance, albeit slim, of usurping the Bund future as the benchmark for the euro yield curve.
With its LFB concept already logged at the patent office, AVM approached Liffe late last year. It has also been working on an over-the-counter version in the US - a so-called Libor financed treasury repo (LFTR) - in conjunction with Delta Clearing Corp.