tracts as hedging tools.     The increasing importance of interest rate swaps as hedging and even benchmark instruments was a primary motivation behind the develop- ment of an exchange-traded contract referenced against the swap curve. The swap curve is the inter-bank curve, derived from inter-bank deposits, short-term interest rate futures and interest-rate swaps. Swapnote, intro- duced by LIFFE in 2001, is a standardized contract that allows market participants to put on an exposure to the interest-rate swap curve, but with the ease of access of an exchange-traded future. It is the first such contract in the world. It may be that the euro swap curve becomes the ref- erence not only for valuing non-government securities, but also for Euro- pean government bonds. In that case, the euro swap curve will transform into the cornerstone for the entire euro-area debt capital market, which will deteriorate further the relationship between government bonds and non-government bonds. An indication of this is given in Exhibit 12.14 which shows the yield curves for the swap curve as well as two govern- ment curves and a AAA-rated security. The non-government security mir- rors the swap curve much more closely than the government bonds. Swapnote may be thought of as combining the features of an exchange- traded futures contract and an OTC FRA contract. Alternatively, it may be viewed as a cash-settled bond futures contract in which the delivery basket consists of a single bond. It is referenced to the euro interest-rate swap curve, and contracts are provided for two-, five-, and ten-year maturities. The contract can be used for speculative purposes, or for hedging purposes of credit exposures such as corporate bonds or an interest-rate swap book. In theory, it provides a closer correlation between the hedging instrument     and the exposure, thus reducing basis risk. By using an exchange-traded contract rather than swaps themselves, users also gain from the advantages associated with exchange-based trading and central clearing. This includes lower regulatory capital requirements, removal of counterparty risk, and elimination of administration requirements of actual swap contracts, which can stretch out to many years. Market participants will compare this to hedging using conventional interest-rate swaps, which involve credit line issues, documentation issues, and bid-offer spreads which can make the swap market difficult and/or expensive to access. Market participants can gain exposure to the yield curve out to ten years; beyond that, government bonds must continue to be used.   Contract Specification The Swapnote contract specification provides for a standardized exchange-