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NYSE Euronext’s Liffe to Expand Use of Markit Dividend Forecasts in Pricing, Clearing Services

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NYSE Euronext’s Liffe derivatives exchange is to broaden the range of consensus dividend forecasts from Markit it uses in its indicative options pricing model and in Bclear, its trade confirmation, administration and clearing service for wholesale equity derivatives.

Liffe will expand the population of Markit dividend forecasts to cover predicted dividend amounts and due dates on approximately 5000 stocks worldwide up to four years into the future. Liffe uses Markit’s dividend forecasts as an input in its mathematical pricing models to calculate an option’s fair value and daily settlement prices.

According to Hendrik Koppe, director of market services at Liffe, “ This new agreement will enable us to enhance our current offering, most notably that of our Bclear service.” Bclear is used by investment banks and institutional investors to process equity derivatives trades. The system aims to combine the flexibility of an over-the-counter marketplace with the benefits of a traditional exchange and clearing house environment.

Using Bclear, transactions are conducted on a bilateral basis in the OTC market. Once the trade is submitted to Bclear and accepted, however, it is replaced by an exchange contract. But users still retain the flexibility to specify contract maturity, exercise price and settlement method. They also retain the choice as to whether or not to publish trade details to the market.

Bclear offers this capability for futures and options on hundreds of underlying securities. These include: most European indices; hundreds of European, Russian, South Korean and US securities, including all components of the AEX, CAC 40, FTSE 100, DAX and Dow Jones EURO STOXX 50 indices; variance futures contracts on the AEX, CAC 40 and FTSE 100 indices; futures on the JPMorgan IPOX Europe 50 Index; and options on exchange traded funds (ETFs).

Markit Dividends – formerly known as DaDD and now, along with its index services, part of the Markit Equities group – uses a team of regionally focused research analysts to track local corporations globally. This 25-strong team maintains direct contact with local companies in an effort to collect timely data on dividend dates, policies and specific guidance.

Markit believes this approach allows it to avoid problems relating to time lags in consensus forecasts and what it describes as “the inaccuracies frequently generated from algorithmic models (that) can result in significant trading risks.” The company also maintains that “using the implied dividend will lead to generalisations on the amounts, dates and tax treatments of stock holders.”

As such, before it releases its projections, Markit’s team analyzes company fundamentals, peer groups, historical patterns, distribution policies and direct company guidance.

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