Longitude Starts Derivatives Auctions

Article excerpt

One of the leading debt market players is set to sign an agreement with Longitude, the innovative New York-based provider of capital market solutions, to launch credit-based derivative auctions.

Late last month, Longitude signed a separate agreement with Bear Stearns enabling the bank to launch similar derivative auctions, but based on corporate performance measures and equity risks.

Bear Stearns signed a letter of intent for exclusive rights to employ Longitude's Parimutuel Digital Call Auction (PDCA) technology, to create derivatives instruments based on US company performance measures.

These PDCA-enabled derivatives will allow Bear Stearns' customers to directly manage risks related to earnings, earnings multiples, revenues and other corporate performance measures.

Details on the forthcoming credit-based derivatives were scarce.

However, it is understood that the bank concerned will be making an announcement soon.

Longitude's technology is deemed to be particularly innovative for two principal reasons.

First, it enables dealers and other auction subscribers to hedge risk in areas where derivatives trading was previously deemed impossible.

As there is no material underlying asset being referenced, these risks have previously only been hedgeable indirectly through inexact proxies.

Second, the system overcomes traditional market constraints, enabling financial intermediaries to provide derivatives to their customers without their assuming the market risk that is normally associated with the facilitation of risk transfer.

Longitude's Parimutuel systems are a subset of mutualised insurance pools, which are both market-neutral and self-hedging.

With these, in-the-money claims are funded by out-of-the-money claims, so that auction "winners" are effectively funded by auction "losers", resulting in a complete elimination of the auction manager's net exposure.

Late last year, the company signed similar agreements with JP Morgan Chase and Deutsche Bank, giving them the exclusive right to hold auctions based on US, European and Japanese economic statistics, inflation and productivity numbers. …