imo, to say the notional of a swaps contract is different than a futures contract is hard to understand, or completely correct.
A conventional swaps contract is equivalent to a series of forwards/futures/CFDs/options contracts for a number of consecutive periods/months.
The following new development about Swap Futures could rectify this conventional (mis)conception by treating them almost equal.
Just 2 cents!
Q
CME deliverable swap futures seek to ease Dodd-Frank clearing constraints
November 26th, 2012
http://www.optionscity.com/blog/cme...seek-to-ease-dodd-frank-clearing-constraints/
Looking to harness market interest in adding exposure to interest-rate swaps, the CME Group is launching a futures contract Dec. 3 that is deliverable into a CME-cleared over-the-counter interest rate swap at expiration.
“The requirement to clear [OTC] swaps under Dodd-Frank is a very big burden for the markets,” said Sean Tully, managing director of interest rate products at CME Group.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act backs the benefits of derivatives oversight, trade reporting, and capital and margin requirements. It also maintains centralized clearing and exchange trading of standardized swaps will reduce counterparty credit risk in the financial system.
These requirements can lend themselves to regulated futures trading. And, Tully says, a futures account is relatively easy to set up. “It can be done in 24 hours.”
Market analysts say the physically deliverable feature of the new CME swaps futures contract makes it stand apart from previous attempts by exchanges – including the CME and LIFFE (with its Swapnote contract) — to capture a piece of the OTC swap market, and may heighten its appeal.
Traders say dealer interest in the CME’s current swap futures offering has been percolating, but volume has been meager.
The same can’t be said for the underlying market. As of June 2012, the most recent figures, the notional value of interest rate swaps stood at $379 trillion, with U.S. dollar-denominated swaps representing $123 trillion, according to data from the Bank for International Settlements. The notional value of the contract is used to calculate the periodic payments and is not exchanged.
In a single-currency OTC interest rate swap the parties involved agree to exchange periodic payments based on a fixed interest rate that is agreed upon at the start of the transaction. Floating rate reset dates and payment intervals also are established at the outset of the deal.
As with interest rate futures, swap market participants generally use interest-rate derivatives to hedge interest-rate risk or to take a position on rates’ future direction.
At the CME, the deliverable U.S. dollar-denominated interest rate swap futures will be available on benchmark maturities, or tenors: 2, 5, 10 and 30 years, quoted on a price basis, with a fixed coupon for each contract provided at their listing. The contracts will settle quarterly, conforming to existing IMM settlement dates. In addition, the contracts will be subject to futures-style margining and automatic netting of positions.
Jack Callahan, executive director of OTC products at the CME Group, said open interest remains in the exchange’s existing cash-settled swap futures contracts, ”and we have no plans to delist them.”
There will be no conversions of the existing swap contracts by CME, Callahan said, but market participants can choose to roll out of their cash-settled contracts and into deliverable swap futures.
The CME says Credit Suisse, Citibank, Goldman Sachs and Morgan Stanley are among firms planning to serve as market-makers in the new swaps contract. Block-trade market makers also will be in place, Tully said.
“We have had very positive feedback from asset managers and hedge funds, who want exposure to swaps” without the burden of the new OTC regulations, Tully said. “We really designed this for asset managers and banks.”
The CME’s Eurodollar contract has been a customary hedge vehicle for OTC interest rate swaps, and Tully says he expects that symmetry will continue between the new swap futures contracts and Eurodollar futures, particularly toward the front end of the curve.
A key goal of Dodd-Frank’s Wall Street reforms, as stated on the Treasury’s website, is to bring “the derivatives market out of the darkness and into the light of day.”
The fact that the new CME swaps contract is standardized and transparent “is a very big appeal,” said Tully.
UQ
A conventional swaps contract is equivalent to a series of forwards/futures/CFDs/options contracts for a number of consecutive periods/months.
The following new development about Swap Futures could rectify this conventional (mis)conception by treating them almost equal.
Just 2 cents!
Q
CME deliverable swap futures seek to ease Dodd-Frank clearing constraints
November 26th, 2012
http://www.optionscity.com/blog/cme...seek-to-ease-dodd-frank-clearing-constraints/
Looking to harness market interest in adding exposure to interest-rate swaps, the CME Group is launching a futures contract Dec. 3 that is deliverable into a CME-cleared over-the-counter interest rate swap at expiration.
“The requirement to clear [OTC] swaps under Dodd-Frank is a very big burden for the markets,” said Sean Tully, managing director of interest rate products at CME Group.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act backs the benefits of derivatives oversight, trade reporting, and capital and margin requirements. It also maintains centralized clearing and exchange trading of standardized swaps will reduce counterparty credit risk in the financial system.
These requirements can lend themselves to regulated futures trading. And, Tully says, a futures account is relatively easy to set up. “It can be done in 24 hours.”
Market analysts say the physically deliverable feature of the new CME swaps futures contract makes it stand apart from previous attempts by exchanges – including the CME and LIFFE (with its Swapnote contract) — to capture a piece of the OTC swap market, and may heighten its appeal.
Traders say dealer interest in the CME’s current swap futures offering has been percolating, but volume has been meager.
The same can’t be said for the underlying market. As of June 2012, the most recent figures, the notional value of interest rate swaps stood at $379 trillion, with U.S. dollar-denominated swaps representing $123 trillion, according to data from the Bank for International Settlements. The notional value of the contract is used to calculate the periodic payments and is not exchanged.
In a single-currency OTC interest rate swap the parties involved agree to exchange periodic payments based on a fixed interest rate that is agreed upon at the start of the transaction. Floating rate reset dates and payment intervals also are established at the outset of the deal.
As with interest rate futures, swap market participants generally use interest-rate derivatives to hedge interest-rate risk or to take a position on rates’ future direction.
At the CME, the deliverable U.S. dollar-denominated interest rate swap futures will be available on benchmark maturities, or tenors: 2, 5, 10 and 30 years, quoted on a price basis, with a fixed coupon for each contract provided at their listing. The contracts will settle quarterly, conforming to existing IMM settlement dates. In addition, the contracts will be subject to futures-style margining and automatic netting of positions.
Jack Callahan, executive director of OTC products at the CME Group, said open interest remains in the exchange’s existing cash-settled swap futures contracts, ”and we have no plans to delist them.”
There will be no conversions of the existing swap contracts by CME, Callahan said, but market participants can choose to roll out of their cash-settled contracts and into deliverable swap futures.
The CME says Credit Suisse, Citibank, Goldman Sachs and Morgan Stanley are among firms planning to serve as market-makers in the new swaps contract. Block-trade market makers also will be in place, Tully said.
“We have had very positive feedback from asset managers and hedge funds, who want exposure to swaps” without the burden of the new OTC regulations, Tully said. “We really designed this for asset managers and banks.”
The CME’s Eurodollar contract has been a customary hedge vehicle for OTC interest rate swaps, and Tully says he expects that symmetry will continue between the new swap futures contracts and Eurodollar futures, particularly toward the front end of the curve.
A key goal of Dodd-Frank’s Wall Street reforms, as stated on the Treasury’s website, is to bring “the derivatives market out of the darkness and into the light of day.”
The fact that the new CME swaps contract is standardized and transparent “is a very big appeal,” said Tully.
UQ
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