CME Group Expands Deliverable Swap Futures Offering with 7 and 20-Year Denominated Contracts (with Zwirb Comment)
Commentary by Bob Zwirb
The Chicago Mercantile Exchange Group ("CME") announced that it will launch 7 and 20-year U.S. Dollar Deliverable Swap Futures ("DSFs") on September 28, 2015. The new DSFs are a product extension to the 2, 5, 10 and 30-year deliverable swap futures that it offers currently.
According to CME, DSFs are held by all major client segments, including asset managers, leveraged money and dealers. The CME stated that "[a]t expiration, the contracts physically deliver into an OTC interest rate swap cleared by CME Clearing," with the long-position holder becoming fixed-rate receiver and the short-position holder becoming fixed-rate payer. The contracts will be listed on, and subject to, the rules and regulations of the Chicago Board of Trade ("CBOT") and will be submitted to and reviewed by the CFTC.
Commentary
The new swap futures products merit comment because they appear to be created in the wake of the burdens of the regulatory regime created by Dodd-Frank. The CME press release notes that "[t]his product has the same economic exposure as a Market Agreed Coupon interest rate swap; the benefits of a futures contract; and at expiration, all open positions deliver into a CME Cleared Interest Rate Swap." As former CFTC Commissioner Scott O'Malia once observed, the downside of this futurization – i.e., of using futures as a substitute for swaps – "is reduced hedging flexibility because futures contracts, unlike swaps, cannot be individually tailored to meet specific risk needs." According to Mr. O'Malia, this less-than-perfect way to hedge is a direct result of new rules designed to encourage more swaps to be traded on SEFs, but which instead have introduced "unnecessary complexity, vagueness, and costs into the markets, including the commodity markets," which in turn have led some hedgers to seek out alternatives, such as swap futures (see Commissioner O'Malia's March 2014 Keynote Address).