Swap futures contracts are continuing to see volume growth and expand to other regions and asset classes.
This week, the Chicago futures exchange Eris Exchange announced that it struck a swap-futures licensing agreement with the TMX Group's Montreal Exchange (MX). Under this agreement, MX and Canadian Derivatives Clearing Corp. will offer trading and clearing of Canadian dollar swap futures and options based on the Eris methodology.
"What we now are seeing is an expansion of the swap futures ideas into other jurisdictions and asset classes beyond USD rates," Eris COO Michael Riddle told us.
In the past few weeks, Eurex has announced deliverable swap futures in Germany through an agreement with Goldman Sachs. "Swap futurization is migrating around the globe, and exchanges are selecting the methodology that best suits them," Riddle said.
He explained what MX is licensing this way: "The Eris methodology encompasses patent-pending innovations, trademarks, and software that allow a futures exchange to create a cash-settled futures that mimics the cash flow of an OTC swap in a pure futures form, accruing the benefits of futures for the full two-, five-, seven-, or 10-year duration of the position."
The US was the first to implement financial reforms through the Dodd-Frank Act, but other jurisdictions are considering swap futures as they implement the G8 reforms for central clearing and mandatory swap trading. After the Montreal deal, the question is whether Eris will seek to license its methodology to other marketplaces that are implementing the G8 recommendations for central clearing and mandatory swap trading.
"This announcement is the first step in a longer-term strategy to deploy the Eris methodology across a variety of jurisdictions and asset classes through a combination of licensing agreements with domestic partners and direct listing of products on Eris Exchange," Riddle said. Extending the reach of Eris methodologies to other currencies and jurisdictions reinforces the global viability of its methodologies for futurizing swaps.
Current Eris market participants are natural candidates to trade Eris-driven swap futures in other swap jurisdictions. In fact, "this agreement is a direct result of market participants asking Eris to apply the Eris method to Canadian denominated swap interest rate futures," he said. "Canadian dollar-denominated swap futures are among the most requested product extensions at Eris Exchange, n the tier behind the Euro and British Pound-denominated forwards.",
In addition to licensing its swap futures methodology, Eris continues to gain volume on its exchange as market participants react to the increasing costs of cleared OTC swaps. "This is driving people to seek out alternative ways to obtain swap exposure through more efficient instruments."
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Record daily volume in swap futures
On Sept. 5, five days before announcing the MX licensing agreement, Eris Exchange broke a daily volume record for US dollar interest rate futures with 21,014 contracts traded, valued at more than $2.1 billion in notional value. The previous record of 13,252 contracts was set June, 21, 2013. Total open interest in Eris Exchange US dollar interest rate swap futures jumped 4,651 to a record 129,776; open interest has grown 143% in the past 12 months.
Riddle cited specific factors contributing to Eris Exchange's record volume: the increased number of market participants over the past six weeks, increased trading by previous participants, a quarterly roll cycle, as well as reaching a critical mass of diverse market participants within its central limit order book (CLOB).
Eris has seen more end users -- hedge funds, asset managers, and other traditional swap end users -- turning to swap futures as an alternative to cleared swaps. SEFs, the regulated trading venues for OTC cleared swaps, have been struggling to migrate the buy side to their new venues. Traditional swap end users are drawn to swap futures because of the more capital efficient treatment of futures for initial margin at the clearinghouse, he said.
Newcomers to the Eris market have cited other factors in their decision, including the fact that "the swap futures exchange offers truly anonymous central limit order books," noted Riddle. By contrast, "SEFs, by and large, have been unable to deliver to end users viable liquidity in an anonymous central order limit book."
According to a Financial Times report (subscription required), swap dealers have warned the CFTC that most trading in SEFs is occurring in the more "opaque" request for quote (RFQ) model through dealer-to-dealer or dealer-to-client venues. It has not migrated to the all-to-all anonymous trading model envisioned by regulators.
Meanwhile, traditional end users that want anonymous central order book trading, along with pre- and post-trade anonymity and lower margin costs, are paying attention to alternatives like Eris Exchange.Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio