Eris Updates on Swaps Clearing

Terry Flanagan

Having assisted trading clients in meeting regulatory mandates for swaps clearing, Eris Exchange — one of three U.S. exchange operators to offer swap futures along with CME Group and InterContinental Exchange – is taking stock of open interest growth and preparing to launch its quarterly 7-year Standard.

“Our view, now that we are past the hyper focus on trading and execution mandates, is that we are getting relationships and operations down,” Eris Chief Executive Neal Brady said on a Sept. 12 webinar. “Firms have learned and adapted to the rules and met the requirements. In 2014, attention will turn toward optimization – how can I do it more efficiently and add new markets for trading opportunities?”

Describing the migration of swaps from OTC to futures, Eris pointed to open interest of 58,000 swap futures contracts on September 11, almost triple the 20,000 contracts at year-end 2012 and double its open interest on June 30. The increase is expected to continue, exchange officers said in a webinar.

The role of Futures Commission Merchants was cited as a factor that adds appeal to swap futures. “All trades are mediated and fully guaranteed by the clearing firm,” Brady said. “This is the straightforwardness of the futures market.”

In addition to Eris’ standards in 2-, 5-, 10- and 30-year durations, a 7-year standard swap future will be listed Sept. 17 and become effective Dec. 18. Like the others, it will have a 2-day variation margin, automatic position netting, and ability to roll or hold positions until maturity.

It’s an efficient way to trade invoice spreads compared with the same trade in OTC markets, as it reduces initial margin by 74% by replacing the Libor leg of a 10-year invoice spread with a 7-year Eris standard, according to Eris.

“It’s a duration match,” said Kevin Wolf of Eris’s product-development team. He cited demand from mortgage hedgers for a more liquid point between the 5- and 10-year products, and from end users trading swaps with Libor exposure versus Treasury spreads.

A Trading Technologies blog described the invoice spread. “A swap spread trade is typically constructed by buying or selling a Treasury bond and paying (or receiving) the fixed rate of an interest rate swap with an identical maturity. The same trade, known as an invoice spread, can be built using Treasury futures and Eris interest rate swap futures.”

Margin offsets are available for the standard, where they are not for the cash products.

Regarding potential for broadening beyond interest-rate swap futures, Brady said the exchange would consider other credit markets, currencies and options.

“We operate the exchange for interest rate swap futures, but demand we see from firms – bank dealing desks, hedge funds, global players – gives us feedback that they clearly are anxious to access this product in Eurodollars and other currencies,” he said. “Today, there is great demand for applying this to the swaption market, as it could significantly add to the liquidity in that space.”

Wolf noted that Eris’ data showed that year-to-date, volume is skewed 80% to standards and 20% to flexes, but in the last two months, the distribution is about 50% each. “This is more aligned with what we expect going forward,” for current Eris swap futures products, “as physical contracts – ‘flexes’ – are more similar to what people have been doing (in OTC markets) for years.”

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