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UPDATE 2-CME asks CFTC to clear 12 new ag swap contracts
May 5, 2010 / 8:52 PM / in 8 years

UPDATE 2-CME asks CFTC to clear 12 new ag swap contracts

* 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 (Reuters) - 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 contracts.

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 selling commodities.

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 single day.

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)

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