‘Futurization’ Enters CME Metals Market

Shanny Basar

Capital constraints have led to market participants having the highest level of interest in using exchange-traded versions of over-the-counter derivatives according to Derek Sammann, global head of commodities and options products at CME Group.

Derek Sammann, CME Group

Derek Sammann, CME Group

Sammann said at a media briefing in London today: “There is greater interest than ever before in using exchange-traded versions of swaps and over-the-counter products.”

Regulations such as the Basel III leverage ratio have introduced stricter capital requirements, which has led to banks reducing their balance sheets, and capital efficiency becoming increasingly important.

“Clients increasingly want to lay off risk in the same central clearing counterparty to achieve capital efficiencies,” added Sammann.

As a result CME Group is launching a new precious metals spot spread product in January next year. Two-day spot gold futures and silver futures contracts will be launched in London and listed on Comex, the CME’s metals market. The contracts will be physically settled in London but cleared in the CME clearing house in the US, allowing clients to net margins with the rest of their Comex positions.

“We are building a bridge between the world’s two largest pools of precious metals liquidity in London and the US but clearing through one CCP in the US,” said Sammann.

The precious metals spot spread product increases capital efficiency in a similar way to portfolio margining in the interest rate swap market, which CME has offered since 2012. Portfolio margining allows clients to offset margins for swaps cleared at CME against the margins for exchange-traded interest rate contracts.

“Spot spread creates greater capital efficiencies than portfolio margining as futures in London will be netted against futures in the US,” said Sammann. “There are opportunities to offer similar capital efficiencies across other asset classes and geographies.”

Terry Duffy, CME Group executive chairman and president, said in the exchange’s latest results announcement last week that the third quarter included 22% year-over-year growth in metals average daily volume and 17% growth in energy.

Phupinder Gill, chief executive of CME group, said in a statement that the exchange is focussed on globalizing, growing its options franchise and providing innovative products.

“We made progress during the quarter, as evidenced by the continued expansion of volume from outside the United States – most significantly in Asia in both energy and metals,” Gill added. “The proportion of average daily options volume traded electronically hit an all-time high in the third quarter, which has already been surpassed so far in the fourth quarter.”

Sammann said CME had experienced a massive surge of activity on June 24, after the results of the UK vote to leave the European Union were announced, without any system problems.

Young-Zin Chang, global head of metals products at CME Group, said at the briefing today: “We provide nearly 24 hours of liquidity electronically so clients were able to trade metals, especially gold, in Asian hours after the Brexit vote results.”

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