CBOE looks to bring back interest in Treasury futures

CBOE is exploring an incentive scheme to bring a more diverse set of liquidity providers for the product.

The Chicago Board Options Exchange (CBOE) is seeking to rejuvenate activity in its interest rate volatility futures, which have failed to record any volumes since launching two years ago.

In November 2014 CBOE launched the 10-year Treasury note volatility index (TYVIX) future, as a way for traders to hedge interest rate volatility based on US government debt. The product marked the first interest rate exchange traded product for CBOE.

Yet volumes never took off, largely due to the absent of liquidity providers amongst banks and dealers.

Speaking to The Trade Derivatives John Angelos, director of global client services at CBOE, explained: “We wanted to go to market with a group of market makers. We did have plans with three market makers. Unfortunately before launch two backed out so we only went to market with one.

“In the early stages there was a lot of demand and the market maker wasn’t set up to take on that flow. So there was a lack of liquidity from day one as a result of that.”

The lack of liquidity providers has plagued companies trying to get new products off the ground, despite organisations claiming that the market for futurising interest rate derivatives is substantial.

But, with major banks pulling back from market making, take-up has so far been less than CBOE had anticipated. Speaking at this year’s FIA IDX conference in London, industry experts agreed there are still a number of barriers for exchanges to overcome before volumes in these products take off.

Despite this, the absence of traditional market-makers has left a gap for non-bank firms with lower capital requirements to fill the vacuum.

Now, in a bid to win back market makers for the product, CBOE says it has received internal approval from its legal team to initiate a liquidity incentive programme, and is in the early stages of contacting potential suitors.

Angelos added: “We have been… trying to work on market structure, to source enough pools of liquidity from various dealers and market participants to handle this flow. We have been trying to come up with additional forms of incentives to go after high-quality market participants to provide that liquidity.

“It is the dealers, the shadow banks, some of the bigger funds that are stepping up and taking on some of the roles of the traditional banks [that we are targeting]. So right now we are being very selective to make sure we have a high quality participant to step into this role.”