Eris: Trading IR Futures cheaper than via ISDA IRS

3 Responses to “Eris: Trading IR Futures cheaper than via ISDA IRS”

1. 

   Will Acworth July 31, 2012 at 14:31

   thanks for posting. that sure looks like a strong argument — but what do swap traders say?

2. 

   Bill Hodgson July 31, 2012 at 14:33

   I’ll contact someone I know and see if I can get feedback

3. 

   Bill Hodgson July 31, 2012 at 17:22

   Some feedback from a traders viewpoint:

   ERIS assumes that when trading OTC, as opposed to closing out the ‘in-the-money’ opening leg, the swap user puts on a new, offsetting trade. This is not likely given the user can simply 1) assign the original trade away or 2) terminate the trade and monetize the position. Assuming SWAP user does that, the $45,000 11 week carry cost goes away – and has no impact whatsoever on trade economics.

   Secondly, the unwind costs assumes the swap user will pay maximum bid/ask spread when entering and exiting the trade – this is simply not the case as 1) bid/ask spreads in the OTC IRS space are narrow to begin with and highly competitive and 2) if swap user were to unwind the OTC trade with their original counterpart, it is likely some bid/ask spread concession will be made by the dealer.

   In conclusion, the ERIS assumptions are based upon 1) the swap user doing something highly unlikely (namely, opening a new offsetting trade as opposed to unwinding an in-the-money trade) and 2) assumes that bid/ask spreads are more competitive in ERIS than OTC.

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