How European Central Banks Use Futures Markets


The uncertainty in Europe following the French and Greek elections in early May and the threat of an extended crisis has placed the European Central Bank back in the spotlight.

As the Wall Street Journal reported:

If Greece’s fractured politics cannot forge a coalition government in the coming days, then markets may look to the ECB as the last body standing to keep the currency union intact.

But with all the attention on the ECB lately, it’s easy to forget that Europe and the surrounding region is made up of several central banks with many issues that have little or nothing to do with Greece or protecting the euro.

For example, in late April, we hosted senior central bankers from 12 countries across Europe, the Middle East and Southeast Asia at our European headquarters in London to discuss how those central banks and the derivatives industry interact.

The topic most on the minds of everyone at the event was not potential bailouts, but financial regulation. In particular, questions were raised around over-the-counter (OTC) clearing for derivative products and the current proposals in both the United States and Europe.

In addition, the group discussed key tools for interest rate management, including Eurodollar and Treasury futures and options, Gold as a reserve currency, foreign exchange as an asset class, and the role of the Renminbi in the global economy — all issues where futures and options markets play a pivotal role.

Not that the fiscal crisis in the Eurozone isn’t something that these banks consider. They must construct strategies around the potential fallout of the situation here. But that’s where markets can help.

Markets like ours are host to trading and clearing in asset classes that are intimately tied to the heartbeat of any country’s economy: interest rates and foreign exchange. Banks frequently use interest rate futures and options to hedge and these instruments also provide a useful bellwether of market sentiment.

This is the first time we have held our Central Bank Forum in London, following the model that we established in Chicago in 2011 followed by Asia in March.  These forums provide a platform for sharing ideas between key participants in policy-setting and reserve management , and discussing current developments in the market.

Often, those developments involve the uncertain fiscal environment in Europe, but they might also deal with regulation, emerging markets, or inflation. In all of these cases and many others, futures and options play a significant role in managing the associated risks.


Danielle Dycus is managing director of client development and services for banks at CME Group.

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