NEW YORK, Nov 29 (IFR) - CME Group Inc is planning on Monday
to launch a new futures contract tied to interest rate swaps,
taking advantage of a new regulatory landscape for an
The financial regulations known as Dodd-Frank have made a
push for over-the-counter derivatives such as plain vanilla
interest rate swaps to be traded on exchanges and through
central counterparties and to be reported to trade repositories.
If over-the-counter (OTC) contracts are not cleared by a
clearinghouse, they could be subject to higher capital
requirements. That, along with the margin that is required to
be posted when trading a futures contract or a swap, can make
such trades prohibitively expensive for some end-users.
That's where interest rate swap futures come in. The product
is standardized, deliverable and references an interest rate
swap as an underlying with two-year, five-year, 10-year and
30-year maturities as benchmarks. Touted as efficient and
cost-effective, the forward contracts are guaranteed by the CME.
The cost efficiencies can be seen in the difference in
margin requirements between "plain vanilla" cleared interest
rate swaps and the new swaps futures. CME says the new contracts
offer margin savings between 45% to 73.5% over that of cleared
IRS and futures.
The difference in margin rates has to do with the perception
of worst-case risk scenarios, according to George Goncalves,
Head of Rates Strategy, Americas at Nomura.
This perception stems from the staggered start dates,
maturity dates and other unique characteristics of OTC products
which are perceived as taking longer -- up to about five days --
to exit in case of market distress, he said in a note. By
comparison, the exit from swaps futures takes just two days.
But Goncalves says while the standardized contracts could
appeal to some participants who lack access to the OTC swap
markets, the "capital efficiency" aspect may be overstated.
"For a well-hedged OTC book, the netting amongst various
positions and the resulting risk reduction could decrease the
total collateral requirements," he said.
Margin savings aside, the standardization of the contract
will make it easier to clear with a clearinghouse, however, it
will also reduce its adaptability and the uniqueness seen in an
"The OTC market is far more flexible in terms of dates,
tenors and coupon," said a swaps trader.
"The problem (with IRS futures) is that by their very nature
of IMM dates, then they are too rigid: just four quarterly dates
per annum, and of designated maturities and priced using
pre-determined coupons, " he said.
Most futures and options use IMM, or International Monetary
Market, dates as expiry with termination occurring on the third
Wednesday of March, June, September and December.
In spite of a perceived lack of flexibility, the swaps
trader said the IRS futures may be useful.
"In terms of a 'quick and dirty' hedge for active swap
books, then they may well prove useful, especially in light of
their effectiveness (cheapness?) margin/collateral wise."
"However I remain unconvinced, as the bond and note futures
currently serve as the proxy hedge to swappers, which still
provide ease of execution and solid liquidity," he said.
The trader was referring to the deliverability of IRS
futures as many are unlikely to be carried to maturity as it
exposes the user to an increase in margin rates.
The launch date is December 3. CME Group says it has a
handful of market-makers including Citigroup, Goldman Sachs and
Morgan Stanley committed to the product.
However, one futures trader said he has seen "very little
enquiry so far in IRS futures." His "gut" feeling is that "they
are too similar to the existing 'swapnote' futures which have
been up and running for a long while now, yet still flounder
near the bottom of the daily volume tables."
Swapnote futures are also exchange-based, denominated in
two-year, five-year and 10-year maturities, as a method of
managing interest rate risk via bond futures tied to interest
Nomura's Goncalves said this is not the first time CME has
attempted to launch IRS futures. Back in 2009, a similar swaps
future was introduced, "but the product was not particularly
well-received," he said.
This was due to the difference between the futures product
and OTC product which could have prompted the former to
"cannibalize" the latter.
Now however, Goncalves says the regulatory environment
favors these futures products.
Time will tell. For the swaps trader, he maintains most of
the swaps market will "go on screen" in terms of execution, but
perhaps not necessarily through a fixed futures contract.
"The end-users of swap markets are financial institutions
and corporates who want to match out their cashflows and
exposures, which are most easily and explicitly achievable via
the OTC market, " he said.
"In the end, I imagine it will be more akin to matched
betting sites, or if you prefer, matched shopping sites (such as
eBay)," he said
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