"I think the european players and the larger swap houses in Europe will be really interested in this contract," chairman of SIMEX interest rate committee, Nick Forgan, said at the launch of the contract.

The new three-month euroyen futures contract is based on the London Interbank Offered Rate (LIBOR), while existing euroyen contracts, available on both SIMEX and the Tokyo International Financial Futures Exchange (TIFFE), are based on the Tokyo Interbank Offered Rate (TIBOR).

LIBOR is calculated by the British Bankers' Association. The TIBOR euroyen rate is higher than the LIBOR, because its predominant borrowers are Japanese banks, which are regarded as worse risks than the banks in London.

Traders said the widening spread between the Tokyo-based and London-based rates hadgenerated demand for a futures contract that did not reflect the Japanese risk premium--since not every one with yen exposure is exposed to Japanese borrowers.

SIMEX said its decision to launch a second euroyen contract was in part due to requests by members to counter this widening spread between LIBOR and TIBOR benchmarks.

"If (financial institutions) are trading the swap markets and they are referencing settlement in LIBOR, every time they trade in the current TIBOR contract they have the concern of the TIBOR-LIBOR spread," Forgan said.

SIMEX said in a statement the new contract would allow market-users who need to hedge their LIBOR-benchmarked exposure to do so efficiently in an open and regulated marketplace.

Warnings to TIFFE that they might have been left by SIMEX pushed the Tokyo exchange to consider listing three-month euroyen futures contracts based on LIBOR in March, according to market sources in Japan.

"It wasn't a surprising move by TIFFE... There was certainly demand from membersthere but I think there are definite advantages of trading through the SIMEX exchange," said Forgan, who is also a vice president for J.P. Morgan in Singapore.

"I think flexibility is a major advantage, certainly on the options side as SIMEX can offer different types of spread and exotic types of options not available on TIFFE's Screen-based system," he said.

"The new contract will be of specific interest to swap players--though once liquidity has improved, other players will be drawn in," he said.

Asked how the new LIBOR-based Euroyen contract might affect volume in the existing TIBOR-pegged contract, Forgan said, "I think certain players will switch from TIBOR into LIBOR contracts but, overall, volume in the euroyen market as a whole should improve."

But some local traders were cautious about the impact the new contract might have.

"There's a wait-and-see mood on the pit. We're waiting for London to open to see how they react to the launch," a trader at a European securities house said.

"Thereis a chance players could be drawn to the new contract by lower interest rates and that volume in the TIBOR contract could shrink," she said. "But there again, it may even lift interest in TIBOR as players play with the spread between the two markets," she added.