The Chicago Mercantile Exchange hopes its bankruptcy futures contract, designed to help lenders hedge against losses, will soon trade as fast as pork bellies.

So far, it has not. Since the opening bell last Monday, the security tied to quarterly bankruptcy filings has not traded even once.

Exchange officials said they think credit card issuers will be attracted to the product once they figure out how it can help them.

A company can lock in a particular bankruptcy rate for a future date, assured that if the rate goes higher, it would be compensated for losses.

"We've got to get people comfortable with looking at this stuff," said Peter Barker, director of currency and interest rate marketing at the exchange.

Once bankers and investors scrutinize the concept, Mr. Barker said they will "stick their toe in the water."

Despite the slow start, some observers said the new instrument comes at a good time, given economists' predictions of a slowdown.

"Banks are concerned about credit risk and bankruptcies," said Sung Won Sohn, senior vice president and chief economist of Wells Fargo & Co. The derivative "is one of the ways you can hedge against that risk."

In the third quarter there were 353,515 business and personal bankruptcies, a 15% jump over the same period last year, according to the Administrative Office of the U.S. Courts.

The Mercantile Exchange has called on banks' treasury departments to sell them on the product.

Some banks have expressed interest, but Mr. Barker would not identify them.

He also hopes to draw participation from insurance companies, investment firms, and speculators.

Peter Sprudzs, director of asset-liability management at Capital One Financial Corp., which helped the exchange develop the product, predicted it would "take a while for volume to ramp up."

Generating interest in the new derivative "requires input from (bank) treasury people, but it also requires participation from folks who have more subject expertise," Mr. Sprudzs said.

Mathematical modelers are trying to help banks overcome their jitters. Risk Management Technologies, a subsidiary of Fair, Isaac & Co., is developing a product that banks could use to assess risk from their own card portfolios, as well as future macroeconomic trends such as interest rate fluctuations. Such a product might help banks determine how many of the exchange's futures to purchase.

As a bank, if "I can buy a sufficient number of futures to compensate me, I am pretty much immunized from chargeoffs exceeding my expectations," said Alan Tobey, director of marketing at Risk Management in Berkeley, Calif.

But Mr. Sohn said banks might look for other ways to reduce risk.

"A lot of times the cost of hedging is prohibitive," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.