US investors have been granted approval to trade a new iteration of hybrid interest rate products that bridge the gap between over-the-counter swaps and listed futures.
The Global Markets Exchange Group today received approval from the CFTC to offer its Interest Rate Swap Constant Maturity Futures directly to US-based firms.
The product, which is the latest innovation in a series of instruments that aim to bring swap-like economics into an exchange traded environment with lower margin requirements, began trading in Europe in August.
By using a constant maturity feature, the future is able to track interest rate exposure at every point on the euro yield curve on a daily basis, out to 30 years. The future is priced off a newly-created index – the Interest Rate Swap Index Average – which is calculated by Trad-X, the OTC trading arm of Tradition. Tullett Prebon provides live bid and offer prices for the index.
“With the CFTC approval, we can further expand by offering our IRS CMF to US-based firms,” said Hirander Misra, CEO and co-founder of GMEX Exchange.
“This is an important part of our growth strategy as it enables a wider range of buy and sell-side participants to gain access to our innovative products to facilitate effective hedging of their interest rate exposure.”
Contracts traded over the start-up exchange will be confirmed and cleared at Frankfurt-based derivatives exchange, Eurex. Transactions will be processed via the Eurex Trade Entry Service, which has only recently been made available to US-based exchange participants.
Activity has been muted since the European launch, but the structure has garnered strong industry backing.
Prior to launch, GMEX won investment from Deutsche Boerse, the ultimate parent of Eurex, which puts the contract head-to-head with the bourse’s own euro-swap futures product. Forum Trading Solutions and Societe Generale also took a stake in the start-up firm.
The French bank is signed up to trade the contracts alongside Bank of America Merrill Lynch and RJ O’Brien.
While swap futures contracts have enjoyed growth in the US, the product has yet to gain traction in Europe, where the mandatory shift of OTC swaps into central clearing and regulated venues has been slow to get off the ground.
Open interest in the CME’s US dollar deliverable swap future currently stands at over 70,000 contracts, while the euro-denominated equivalent is floundering. Similarly, Eurex’s own euro-swap future has yet to clock-up interest.
But that could change in April 2016 when new EU force standardised OTC derivatives into central clearing, with buy-side firms having an additional six months to comply.
The Eris Exchange’s cash-settled US dollar swap futures contracts have combined open interest of 157,000, of which around half represents standard contracts that attract the lower futures margin, while the remainder is in the Flexes products that attract OTC margining. Euribor versions of those contracts were launched on the InterContinental Exchange but have yet to build interest.