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Dow Jones-AIG Commodity Indexes licensed to Eurex to underlie futures and options

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Global index provider Dow Jones Indexes has licensed the Dow Jones-AIG Commodity Index and its nine sector sub-indices to international derivatives exchange Eurex

Global index provider Dow Jones Indexes has licensed the Dow Jones-AIG Commodity Index and its nine sector sub-indices to international derivatives exchange Eurex to underlie standardised exchange-traded futures and options contracts, which are scheduled for launch in the first quarter of next year.

This will be the first time that the nine Dow Jones AIG Commodity Sub-Sector Indexes, the Dow Jones-AIG Energy, Petroleum, Livestock, Ex-Energy, Grains, Industrial Metals, Precious Metals, Softs and Agriculture sub-indices will serve as the basis for futures and options contracts.

‘Commodities enjoy a vast recognition by market participants who are aiming to expand their portfolio beyond traditional equity asset classes,’ says Michael A. Petronella, president of Dow Jones Indexes.

‘The Dow Jones-AIG Commodity Index series offers a variety of sophisticated benchmarks to measure the commodities market as a whole, or to concentrate on single commodities or sectors. The superior methodology provides a balanced weighting of the 19 commodities in this family.’

Peter Reitz, a member of the Eurex executive board, says: ‘Our planned derivatives on the Dow Jones-AIG Commodity Indexes will significantly increase our product offering in the commodities area. This is another milestone in our strategy to offer our customers multi-asset class products on a global scale. We will add transparency and central clearing to the existing OTC index swap market.’

The Dow Jones-AIG Commodity Index was introduced in 1999 and consists of futures contracts on 19 physical commodities. The family of indices includes the nine sector sub-indexes, multiple forward month indices and sub-indices for each of the 19 individual commodities in the original index, as well as for cocoa, lead, platinum and tin.

There are also euro-, yen-, Swiss franc- and sterling-denominated versions of the Dow Jones-AIG Commodity Index and Dow Jones-AIG Commodity Spot Index, and total return versions of each of the excess return indices and sub-indices. An estimated USD35bn was tracking the Dow Jones-AIG Commodity Indexes at the end of the third quarter.

As of October 15, the Dow Jones-AIG Commodity Index was down 25.05 per cent for the year to date, the Energy Sub-Index down 22.19 per cent, the Petroleum Sub-Index down 22.52 per cent, the Livestock Sub-Index down 24.42 per cent, the Ex-Energy Sub-Index down 26.42 per cent, the Grains Sub-Index down 31.65 per cent, the Industrial Metals Sub-Index down 29.30 per cent, the Precious Metals Sub-Index down 11.01 per cent, the Softs Sub-Index down 29.50 per cent and the Agriculture Sub-Index down 30.55 per cent.

Eurex will also launch US dollar-denominated futures and options on gold on February 2. The contracts will be based on the benchmark gold fixing of the London Bullion Market, referenced to the largest gold spot market in the world.

The exchange says its gold contract is particularly designed to offer access to clients in Europe that prefer or require a cash-settled contract. Only a small percentage of forward transactions actually result in physical delivery, so Eurex’s cash settled contracts can accommodate both physical and financial market participant’s requirements.

Market-makers will ensure a liquid order book from the launch date. Eurex says it will also add value to the OTC gold market through its clearing facilities which allow bilateral negotiation of trades combined with straight-through processing on a single platform and central clearing, mitigating counterparty risk. To attract OTC flow, the new products will have a block trade size of one contract and can be cleared via the Eurex Clearing OTC facility.

By offering cash settled futures and options on the Dow Jones-AIG composite index and on some of the sector indices, Eurex says it will be the first European exchange to enable trading in commodity index derivatives. These products will also offer a central counterparty structure in a market segment that to a large extent is currently based on OTC index swaps.

The new products will complement the existing emissions trading product suite available at Eurex. Since December last year, Eurex in co-operation with the European Energy Exchange has been offering futures and options on European Union Emission Allowances as well as futures on Certified Emission Reductions.

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