January 30, 2013 
A good summary of why futurisation is a headline in the minds of journalists, rather than a major reality shift in trading.
DerivAlert Blog: Speculation on the Futurization of Swaps is Greatly Exaggerated.
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3 Responses to “Speculation on the Futurization of Swaps is Greatly Exaggerated”
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Mr Duffy seems to be trying to take some heat off his own firm – which is a leader in futurization of IRS (but not CDS) but also a leader in IRS and CDS clearing. Whilst small swap participants may hold hope of ducking under the $8 billion threshold (and avoiding CFTC registration), the larger ones would be thinking mainly about optimizing CCP IM funding.
The real question is whether futurization provides a product which albeit cheaper from a margin perspective satisfies the necessary criteria for survival:
1. Shows the right risk / hedging characteristics to be a swap substitute for the intended use (e.g. standard date products may be ok for some uses but not other uses).
2. Establishes sufficient execution liquidity to allow it to compete with the product it is substituting (if it is very difficult to trade through thin liquidity this will inhibit effectiveness).
3. Is tolerated by regulators (especially if execution liquidity is weak this would challenge credulity around the 1-day holding period assumption for futures margin).
Of these it would seem that 1 can be solved but only if 2 is solved for that product design, and that 3 will largely follow the liquidity outcomes on 2. So it all comes down to 2 which depends particularly on whether major swap market makers provide liquidity to the new products / platforms. Since this is not mandated, the outcome is far from clear.
Mr Duffy seems to be trying to take some heat off his own firm – which is a leader in futurization of IRS (but not CDS) but also a leader in IRS and CDS clearing. Whilst small swap participants may hold hope of ducking under the $8 billion threshold (and avoiding CFTC registration), the larger ones would be thinking mainly about optimizing CCP IM funding.
The real question is whether futurization provides a product which albeit cheaper from a margin perspective satisfies the necessary criteria for survival:
1. Shows the right risk / hedging characteristics to be a swap substitute for the intended use (e.g. standard date products may be ok for some uses but not other uses).
2. Establishes sufficient execution liquidity to allow it to compete with the product it is substituting (if it is very difficult to trade through thin liquidity this will inhibit effectiveness).
3. Is tolerated by regulators (especially if execution liquidity is weak this would challenge credulity around the 1-day holding period assumption for futures margin).
Of these my view is that 1 can be solved but only if 2 can be solved for a given product design, that 3 will largely follow the liquidity outcomes on 2. So it all comes down to 2 which depends especially on whether major swap market makers provide liquidity to the new products / platforms. Since liquidity provision is not mandated, the outcome is far from clear.
Good summary Mr Spark, I agree that liquidity and suitability go hand in hand – time will tell.