Trading in futures and options has surged during the last two months and activity could continue upwards as the market begins turning to exchange-traded products in place of OTC derivatives.
Volatility has returned to the markets during September and October following a relatively placid year of trading across the US and Europe.
This injection of this volatility coupled with the increasing cost of trading OTC derivatives has led to a wave of trading across futures exchanges, particularly in the US where platforms have seen daily and monthly records.
CME, the largest platform for financial derivatives in the US, posted an all-time daily record on 15 October, driven largely by the 25 million interest rate futures and options traded off the back of news from the Federal Reserve, indicating there would be a longer wait before interest rates begin to rise.
The cost of executing interest rate swaps has increased exponentially due to new regulations enforcing the central clearing of standardised OTC products and increased capital costs for those which won’t be cleared.
As a result, derivatives exchanges have been preparing for the futurisation of swaps, as futures emerge as a viable alternative to their OTC counterparts.
“There is a view among some market participants that demand will shift away from OTC trading on swap execution facilities (SEFs) due to increasingly onerous regulatory requirements and move toward exchange traded derivatives, specifically swap futures,” saidPaul Gibson, manager, business consulting, Sapient Global Markets.
“While there has been an increase in the volume of swap futures, this trend does not necessarily reflect a wholesale shift away from OTC products.”
The US introduced clearing mandates in a three-part phase-in period last year, while also launching SEFs for interest rate and credit default swaps to be executed electronically.
Interest rate surge
A Tabb report recently surveyed more than 40 buy-side firms, with 70% expecting their listed futures trading volumes to increase over the next 12 months. This was down to a combination of increasing volatility and shift towards OTC alternatives.
“These buy-side firms also see expanding their use of futures in equity-related products and expect to increase their activity in equity options by as much as 89% and ETFs by 65%,” said Matt Simon, head of futures research and author of the report.
CME’s record month followed strong results in September, where activity in interest rates and FX rose significantly compared with the same period in 2013.
Trading in Eurodollar futures and options rose 26% and 29% respectively, while FX volumes increased 39% and open interest hit an all-time high of 2.6 million contracts.
On the same day, CBOE’s flagship S&P 500 Index options and CBOE Volatility Index (VIX) futures set new single-day records. ICE Futures US set a daily record in its US dollar Index futures and the Montreal Exchange also topped its single-day figures.
“Listed products, in my experience, are much more susceptible to short-term market volatility than the majority of OTC products are,” said Jim Myers, senior manager, business consulting trading and risk management, Sapient Global Markets.
“If a firm’s or individual’s portfolio is hemorrhaging money, many investors, both professional and amateur, look to cut their losses or capitalise on undervalued assets.
“It has never been easier than today to execute those transactions in the listed space and therefore volumes tend to explode when we observe market volatility.
Longer-term rates products in Europe have also picked up slightly on Liffe and Eurex, though short-term rates trading remains low.
Either way, since the summer, many of Europe’s futures exchanges have seen an upturn in activity, particularly in listed equity and index contracts.
“If the remainder of the years trading is like September volumes we should surpass activity in 2013,” said Mehtap Dinc, member of the Eurex executive board, in Frankfurt last week.