BTP futures were launched to provide a benchmark for non-AAA government debt across the Eurozone, and Nadja Urban, who led Eurex’s BTP futures development initiative, says the exchange has no plans to add more contracts to capture even lower-grade sovereigns.
"Core countries like Germany and France are both AAA, and some smaller countries also are AAA, like Luxembourg, Austria and the Netherlands," Urban says. "All of these can be hedged with the bund, bobl and shatz. Then you have the non-core countries that have low beta — the AA countries, like Italy and Spain — and these can be hedged with BTP."
Then come the truly problematic countries: Portugal, Ireland and Greece.
"These are non-core with high beta," she says. "Their secondary markets are not tradable at the moment, and there is no one to make a market, so it’s almost impossible to launch a futures product on them."
For that exposure, you’ll have to look to credit default swaps.
"Risk of these countries is almost all credit risk," she says. "The price discovery is not done in secondary cash markets, but in the credit market."
The bulk of the contracts’ users come from Italy and Spain, with heavy spreading between the BTP and the bund.
"The biggest days in BTP futures have come on days when the BTP-bund spread moves the most," says Gustavo Baratta, a BTP market maker for Banca IMI, the investment banking subsidiary of Intesa Sanpaolo Group. He adds that the instrument has attracted hundreds of small traders who already are active on Borsa Italiana’s Mercato Obbligazionario Telematico (MOT) market, making it more liquid than it appears.
"This means that BTP futures have traded in one and two lots, so we’ve seen a lot of iceberg orders — where you come in to sell 100 or so but only show, say, three or four," he says. "A lot of people who are used to the huge volumes of the bund are afraid of coming to BTP with any size, but I think they’ll find it’s quite doable."
He warns that the market can behave erratically when new bonds are introduced near delivery time. This mainly is because any new bond issues that are large enough to be recognized as deliverable are likely to become the cheapest to deliver, and the Treasury isn’t always good at telegraphing that size. In 2010, Eurex lowered the threshold from €10 billion to €5 billion to reduce uncertainty, but the problem persists.
"We’re going through this now with the September expiry," he says. "The Italian Treasury issued new 10-years. In the market, the new issue would be big enough to qualify as cheapest to deliver. But then it became apparent that wasn’t the case, and that the cheapest to deliver would be the September 2021, instead of the March 2022. When that happened, futures had an uptick of half a figure."