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Swap futures

15 March 2016

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Eris expands product range to cover more points on the curve

Eris Exchange has undertaken a massive expansion of its interest rate swap futures, doubling the range of maturities available and introducing a new set of forward-starting contracts.

Eris Exchange has undertaken a massive expansion of its interest rate swap futures, doubling the range of maturities available and introducing a new set of forward-starting contracts. Eris executives said that the expanded product set makes it possible for customers to achieve more precise hedging and curve trading, while providing the compliance, execution, and capital efficiency benefits of standardized futures trading and clearing.

“It was really directly a response to client demand,” said Neal Brady, chief executive officer of the Chicago exchange. He explained that the exchange received more and more requests from people wanting the ability to use Eris futures for their trading strategies and urging the exchange to expand its product range.

The exchange was launched in 2013 and has carved out a small niched in the interest rate derivatives marketplace. Notional value traded in 2015 was $66 billion, up 36% from 2014, and the exchange decided the time was right to roll out a wider range of products for its customers.  

The exchange now offers three types of interest rate swap futures: primary standard swap futures, ultra forward standard swap futures, and invoice swap standard futures.

The primary standard swap futures are now available in 10 tenors, up from five previously, giving customers more points to trade on the interest rate curve. The contracts are available for the next two quarterly IMM effective dates and the coupons match the so-called MAC swaps, which have standard coupons and effective dates.

The ultra forward standard swap futures cover the same 10 tenors as the primary standard, but with forward-starting quarterly effective dates for the next five years as well as ten-year forward-starting contracts.

The invoice swap standard swap futures match Treasury bonds deliverable into Treasury futures traded at CME Group. They are designed to allow customers to trade swap spreads in a futures-to-futures alternative to OTC invoice spreads. Eris officials say using their contract can offer as much as 75% margin savings relative to conventional invoice spreads with OTC interest rate swaps.

John Coleman, director of the fixed income group at R.J. O’Brien & Associates, commented that the expanded range of products will make the Eris swap futures more attractive for hedging interest rate exposures. “Now mortgage hedgers can better manage risk in the 12- to 15-year points on the curve, banks can efficiently manage swap spread risk, and insurance companies can address long-dated liabilities,” Coleman said.

Eris’s current market-makers include Morgan Stanley, Société Générale, DRW, Wells Fargo, and Virtu. Two other dealers are currently in the pipeline as well and three others provide liquidity on an unnamed basis.

Despite the migration away from its flexible contract, Eris will continue to offer the product, according to Brady, as it serves a particular niche that the new products cannot fill. “When you have a bond issuance and you have a specific date the bond comes out and you have to hedge with a swap to that date in order to get things like hedge accounting treatments, which is important for certain corporate issuers and insurance companies, you still have to trade customized,” he explained.  

Going forward, Brady expects that demand for swap futures will grow as banks scramble for ways to shrink their balance sheets in order to keep up with tightening regulation around interest rate swaps. OTC bilateral swaps will begin to require margin, starting with the dealers in September and extending to other users at a later point in time. Contract holders will be required to maintain as much as a 10-day value at risk margin against the position – significantly more than the five-day levels required for cleared swaps.

“Capital efficiency is the name of the game,” said Brady. “Holding less margin and having your clients hold less margin is the name of the game. Our products allow you to trade swap risk but hold it with less margin. Eris gives you the flexibility normally associated with OTC but in a futures construct,” Brady said.

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