NYX Nyse Euronext

Exchanges on both sides of the Atlantic are developing new futures and options contracts based on stock dividends, seeking to harness continued uncertainty around company payouts as the global economic picture improves.

NYSE Liffe launched new cash-settled contracts Monday tied to the CAC 40 Dividend Index, following similar products based on the FTSE 100 introduced in May.

The Chicago Board Options Exchange last week announced plans to list options on the S&P 500 Dividend Index in 2010, the first U.S. products of their kind.

The new class of derivatives is aimed at hedge funds, banks and other institutional investors that carry risk tied to stock dividends, and the products have drawn solid volume since the first contracts debuted in 2008.

"It's about taking a view on expected dividends for the index itself, and how companies will, if at all, change their dividend policies compared to what investors are used to," said Jonathan Seymour, director of equity derivatives for NYSE Liffe, the London-based futures platform of NYSE Euronext (NYX).

The listed dividend derivatives market arose from over-the-counter swaps constructed by banks to lay off risk related to dividend payments.

Shifting the market to exchange platforms like NYSE Liffe, Eurex and the CBOE has allayed counterparty risk concerns while opening up opportunities for arbitrage and calendar spread trades, according to exchange officials.

Since the May launch of NYSE Liffe's FTSE 100 dividend futures, 636,000 lots have traded, with monthly volume peaking in July at 154,000 lots, making the products "one of the most successful product launches in recent times," according to Seymour.

Eurex, the futures unit of Frankfurt-based Deutsche Boerse AG (DB1.XE), has seen 2.3 million Dow Jones Euro Stoxx 50 Index Dividend futures change hands on its market this year, up from 111,000 last year when the first products were introduced.

Beyond the just-launched contracts tied to the CAC 40 dividend index, Liffe has more such products in the works after introducing in late August a dividend index tied to the AEX index of Dutch blue-chip stocks.

At the CBOE, Director of Research Bill Speth said that S&P 500 dividend options will let investors hedge risk as companies emerge from a dramatic downturn that forced many U.S. financial companies to cut their dividends to almost nothing.

"Anyone who owns an S&P stock portfolio is exposed to the risk of decreasing dividends," he said, noting a November report from Standard & Poor's that showed dividends accounting for more than one-third of total S&P 500 index returns over the past 80 years.

U.S.-based futures exchange operators CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE), which both carry exclusive product licenses to trade equity index-based products, have looked at offering their own dividend-linked contracts, according to market participants.

A spokesperson for ICE declined comment, while a CME official said the exchange is considering "any number of product ideas" to address customers' needs.

"There is some interest [in U.S. derivatives futures], but it has to be nurtured," said Larry Young, a Chicago-based trader for Infinity Futures. "I can easily see how that would fit into a portfolio manager's risk management arsenal."

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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