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April 14, 2014

CME Europe Launches Deliverable Swap Futures

CME launches their DSF product within their European Entity and CCP.

CME has launched 2, 5 and 10 year DSF contracts on their European trading platform and CCP. The USD DSFs have had mixed reception but looking at the CME statistics are still climbing in volume, see chart:

Volume of CME USD Deliverable Swap Futures

CME (and other competitors) want to position themselves to provide an alternative to the OTC IRS market, by providing exposure to that market via a future – these contracts are priced from the Swap Market and deliver a real physical IR Swap within the CME OTC clearing platform if you hold your position to delivery.

You can download the underlying data (for the above chart) over here http://www.cmegroup.com/trading/interest-rates/files/dsf-volume-and-oi-tracker.xlsx and see for yourself. Each contract is equivalent to $100k notional, and from the data the open interest is this:

  • 2 Year DSF: $793m
  • 5 Year DSF: $4.3bn
  • 10 Year DSF: $4.8bn
  • 30 Year DSF: $335m

Which compared to the actual OTC IRS market where over $370trn is cleared, means there is plenty of room for the DSF market to grow.

More detailed on the EUR DSF details can be seen over at CME: http://www.cmegroup.com/trading/interest-rates/euro-deliverable-swap-futures.html

One benefit of the DSF contract is that the Initial Margin is subject to a one day holding period using the SPAN algorithm, compared to a five day holding period of an OTC IRS using a Historical VaR calculation. Much has been written and debated in the US about the wisdom of this apparent end-run around the risk approach for an OTC product, there is more discussion of ways CME can offset STIR and OTC products over here: http://www.secfinmonitor.com/the-cmes-paulhac-on-cross-margining-of-futures-and-cleared-swaps-big-savings-but-complicated/

The CME pitch for the contracts follows:

  • Economic exposure to IRS with the margin and liquidity benefits of a futures contract
  • 2-Year, 5-Year and 10-Year contracts
  • Notional value per contract: €100,000
  • Flexible execution with lower block thresholds and longer reporting times of 15 minutes
  • Risk offsets with liquid CME Eurodollar and CBOT Treasury futures and options
  • Reporting simplicity
  • Leverages the success of the USD DSF contract
     

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