CHICAGO -- While debate on the composition of the Bond Buyer Municipal Bond Index contract at the Chicago Board of Trade has died down over the last year, users of futures contract said at a meeting last week that there was still room to improve the index.

Much of the discussion at the Board of Trade-sponsored "industry perspective" on the six-year-old contract focused on the kinds of tax-exempt issues contained in the 40-bond index. One complaint was that the underlying index, which is changed twice each month, only represents the new issue market, and not the outstanding cash market.

"It might be nice for a dealer to use for hedging, but it's less than perfect for portfolio managers to use for hedging," said Jeffrey Pantages, a managing director at Prudential Insurance Co. of America. He pointed out that 60% of the current index is composed of insurance issues, while only four issues were A-rated, making it difficult to hedge "a traditional A, triple-B portfolio with an index of extremely high quality."

Mr. Pantages also took issue with the index last year New York issues at one time made up a disproportionate 40% of the index, while accounting for only 15% of the overall market.

"I didn't want to be in the Northeast, so that stopped me from buying the contract," he said.

David C. Johnson, an assistant vice president at Van Kampen Merritt, said there should be caps on how many insured or specific state issues are included in the index.

Others cited the low volatility of the contract as a reason for using the exchange's larger U.S. Treasury bond futures contract as a hedge for their municipal portfolios.

"If the market goes down, I want to be short something that's going to go down the most, and the municipal contract has only 70% of [the Treasury contract's] volatility," explained Guy Wickwire, a portfolio manager at Fidelity Investments.

Mr. Johnson pointed out that even though the second half of last year was more volatile than the first half of either 1990 or 1991, the municipal index moved an average of only 5/32S a day during the last half of 1990.

"I think patience is the name of the game here," he stated. "Sometimes the contract is not as responsive as the Treasury side is, but certainly there is opportunity."

Mr. Pantages said he was reluctant to use the Treasury contract as a hedge for municipals due to the difference in hedge ratios between the two contracts.

John Lazos, an independent floor trader, defended the contract, saying that "people want this to be 'Son of the Treasury Bond Contract,'" -- one of the most successful futures contracts in the world, while the municipal volume averages only 1,000 contracts a day.

He said that as people get more comfortable with the contract they will find that a large order will generally attract the necessary liquidity from both regular and occasional municipal bond pit traders. "Size begets size," he added.

Last year, some contract users had argued for a smaller number of bonds in the index and for changing the coefficient or number used to average the bond prices within the index to arrive at its value. Exchange officials said much of that criticism has dissipated.

"I think we're evolving as people get more comfortable with the use of futures," said Tom Clark, chairman of the exchange's municipal index subcommittee. "We're seeing a strong show of support for the contract and what we do to help the municipal community manage risk."

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