NYX Nyse Euronext

The U.S. Treasury Department on Wednesday is expected to announce plans for a new range of debt securities that could help sway a developing three-way battle among exchange operators in the huge market for trading interest-rate futures.

The trading community expects the Treasury will sell floating-rate securities in addition to its traditional array of fixed-rate offerings.

Although a Treasury spokesman declined comment on the matter, the agency back in February "led the market to expect that it's a done deal," said Michael Pond, managing director of U.S. rate strategy for Barclays Capital Research.

Rate strategists at RBC Capital Markets said in a recent research note that an announcement about floating-rate securities is "highly likely."

The focus for the exchanges is how Treasury tracks the floating-rate notes. Leaders of NYSE Euronext's (NYX) futures arm believe a soon-to-be launched rate-futures contract would gain traction more quickly if the Treasury selects the General Collateral Finance, or GCF, repo index as the floating-rate benchmark.

New contracts that its NYSE Liffe U.S. unit plans to launch in July are based on the GCF index, and its adoption by Treasury would boost efforts to challenge the dominance in rate futures held by CME Group Inc. (CME), which is also fending off a separate challenge from the bank and broker-backed exchange run by ELX Futures LP.

"It would certainly help if Treasury picks up GCF for a reference benchmark," said Tom Callahan, chief executive of NYSE Liffe U.S.

The GCF index calculates the average interest rate paid each day for "general collateral" repurchase agreements on U.S. Treasury, agency and agency mortgage-backed securities.

Callahan said the GCF index is a "far more precise" hedging tool compared with the London Interbank Offered Rate and the U.S. federal-funds rate. The Libor is the benchmark for Eurodollar futures, listed at CME, ELX and NYSE. CME also lists fed-funds futures.

For more than a year, international regulators and law-enforcement officials have investigated allegations that some traders and bank employees may have manipulated interbank rates.

The British Bankers' Association, which oversees daily Libor settings, formed a steering committee in March, to review rate-setting methods and develop a code of conduct.

Markets tied to the overnight effective federal-funds rate have lost liquidity in recent years due to the U.S. central bank's policy of keeping the rate near zero for an extended period.

However, market strategists at Barclays Capital believe using the fed-funds rate to index floating rates is the Treasury Department's best option.

The funds rate "is far less volatile, the rate is published officially by the Fed, and an established derivatives market already exists," Barclays analysts said in a research note.

"The futures contract should do just fine," regardless of the Treasury's decision, said Barclays strategist Amrut Nashikkar.

The new futures market will enable participants to lock-in future repo funding rates, said Nashikkar.

"Right now, there's no real way of doing that," he said.

The Treasury Department's announcement and NYSE's introduction of repo futures contracts comes as the exchange struggles to overcome a decline in revenue from derivatives trading, dropping 25% to $176 million during the first quarter.

-By Howard Packowitz, Dow Jones Newswires; 312-750-4132; howard.packowitz@dowjones.com

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