11.03.2011

Futures Exchange Drives Capital Efficiencies

11.03.2011
Terry Flanagan

Eris Exchange, a newly-approved DCM,  to provide segregated accounts at CME Clearing.

Futures exchanges are working alongside clearinghouses to provide protection of collateral while also reaping capital efficiencies.

Eris Exchange, a U.S.-based futures exchange has received approval from the Commodity Futures Trading Commission on its application to become a Designated Contract Market (DCM). Eris Exchange also announced the launch of benchmark forward starting interest rate swap futures cleared by CME Clearing and traded on Eris SwapBook and Eris BlockBox.

The DCM framework offers swaps market participants a well-known regulatory and operational structure for migrating OTC risk into a centrally-cleared environment.

The DCM designation paves the way for end users to receive huge margin savings when trading Eris Interest Rate Swap Futures alongside CME Group interest rate futures.

“The DCM enables our products to be handled in industry standard 4D customer segregated clearing accounts at CME Clearing,”  Christopher Rodriguez, chief sales and corporate development officer at Eris Exchange, told Markets Media.

A 4d segregated account contains funds of customers trading futures and options on U.S. exchanges, and are held separate from the FCM’s own funds.

In 2009, prior to the passage of the Dodd-Frank Act, the CFTC issued proposed amending its bankruptcy regulations to create a separate “cleared OTC derivatives account class” that would apply in the event of the bankruptcy of an FCM.

As defined by the CFTC, a cleared OTC derivatives account class would include cleared OTC contracts that “are required to be held in a separate account for cleared OTC derivatives only, in accordance with the rules or bylaws of a clearing organization.”

“The end result is capital efficiency in that users befit from margin off sets of up to 95% against CME Eurodollars and 85% against Treasury Futures. This only happens as a result of our DCM status and is planned to be launched in 2012,” Rodriguez said.

For benchmark forward starting swap futures with standard coupons and IMM dates, dedicated market makers stream live, executable quotes to the Eris SwapBook platform.

The Eris Exchange model provides a standardized swap product that concentrates liquidity, eliminates line item proliferation and reduces the need for compression.

With its approval as a DCM, Eris Exchange is in a position to address demand by swap end users seeking to tap new liquidity pools and maximize capital efficiency in advance of the Dodd-Frank clearing mandate.

“Our product design collapses multiple cash flows associated with OTC swaps into a single futures price and cash flow which transfers through variation margin in a futures clearing account,” said Rodriguez.

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