It looks like a swap, it flies like a swap, what can it be? It’s Eris

Today Eris received CFTC approval to be a Designated Contract Market for their new Interest Rate Swap futures. To go after the ISDA based OTC contract market, Eris has designed

October 31, 2011 - Editor

Category: Dodd Frank

Today Eris received CFTC approval to be a Designated Contract Market for their new Interest Rate Swap futures. To go after the ISDA based OTC contract market, Eris has designed these contracts to get as close to the equivalent ISDA OTC IRS as possible, but still have some of the development in the pipeline. Full details are in this PDF from Eris or go to their website. Duration

Futures: 3M to 2 years
Eris: 30 years, with up to 10 years forward start, so a 40 year curve

Start date

Futures: IMM dates
Eris: Any good business date

Offsets with ISDA IRS

Futures: Given the IMM dates & duration, not so much
Eris: In 2012, they hope to achieve 85% to 95% offset against CME interest rate futures

Processing model:

Eris: Anonymous trading plus integrated clearing at CME
ISDA: A variety of trading methods, with voluntary electronic confirmation at MarkitSERV plus clearing available from SwapClear, CME, SGX and others

Indices

ISDA IRS: many
Eris: 3M LIBOR

Initial Margin algorithm

Futures: SPAN / PCA
Eris: SPAN initially, moving to historic Value at Risk, similar to SwapClear & CME for ISDA IRS
ISDA: 5 year historic VaR at SwapClear, CME and IDCG (soon I think)

Contract netting

ISDA IRS: Not so easy, no standard coupon, tear up service from TriOptima uses risk equivalent algorithm
Eris: Standard coupon, with continuous netting into an open position

Trading

ISDA: Brokers, phone, Single Dealer Platforms, soon to be SEFs and OTFs, not anonymous at the moment
Eris: ErisExchange, anonymous

Documentation

ISDA: Master plus CSA and electronic confirmation
Eris: Exchange regulations only

Settlement

Eris: Fixed leg 6M, Float leg 3M, daily margin calls, starts any good business day
ISDA: Coupons 1M to 12M (or zero coupon) on either leg, daily margin calls, plus optional stubs at either end; also compounding interest

Notional schedule: