* CME to clear new ag swaps in 2010, pending CFTC approval
* Swap listing to include corn, soy, wheat, livestock
(Adds trade reaction)
By Christine Stebbins
CHICAGO, May 5 The CME Group (CME.O), the
world's largest futures exchange, said Wednesday it submitted a
request to the Commodity Futures Trading Commission to provide
clearing services for 12 agricultural over-the-counter swap
The exchange-cleared swaps will include corn, wheat,
soybeans, soyoil, soymeal, live cattle and lean hogs.
Swaps are complicated over-the-counter cash transactions
made between two parties to offset price risk in buying and
CME-cleared ag swaps are privately negotiated deals. But
once the trade is registered on CME's Clearport system for
clearing it is subject to the same mark-to-market rules for
margins and reporting as the exchange's grains and livestock
futures and options contracts.
"Many customers want to bring OTC transactions involving
agricultural products such as grains, oilseeds and livestock to
a central clearing facility in order to mitigate their
counterparty credit risk," Tim Andriesen, CME managing director
of Commodity Products and Services, said in a statement.
Clearing of standardized OTC markets is a priority of the
Obama administration to toughen regulations of OTC derivatives
markets, largely blamed for amplifying the financial crisis.
Additionally, clearing of OTC markets is currently being
reviewed by the U.S. Senate.
CME expects later this year to offer clearing on the 12 new
swap contracts based on specific price settlement schedules,
pending CFTC approval.
"It's a win-win all around for the exchanges, for the
users, for the regulators but it's going to be critical that
they build enough volume to make all that happen," Rich Feltes,
senior vice president of MF Global Research, said.
To grow the volume and liquidity will take more education
among many U.S. grain players who do not use over-the-counter
markets to hedge price risk, brokers say.
"That could be a good first step," said Bill Raffety, a
grains broker with Penson GHCO in New York.
Others are reluctant to trade standardized OTC ag markets.
The CME's latest contracts will join the first-ever cleared
grain swaps launched in April of 2009 -- calendar swaps for
corn, soy, wheat as well as corn basis swaps. The exchange also
lists agricultural index swaps.
While open interest in grain swaps has grown in the past
year, trade interest remains sluggish. Corn calendar swaps are
the most active with open interest as of Tuesday under 2,500
contracts, representing 12.5 million bushels of corn. For
comparison, open interest in corn futures was over 1 million
contracts, or 5 billion bushels.
The new contracts include European-style settlement swaps
for corn, soybeans, wheat, soybean oil, soybean meal, live
cattle and lean hogs which will settle based on a specified
CME also plans to offer Asian-style settlement swaps for
soybean oil, soybean meal, soybean board crush, live cattle and
lean hogs which will settle based on the average of the daily
futures settlement prices during a specific month.
(Reporting by Christine Stebbins; Editing by Alden Bentley)