Futures to see greater demand off the back of volatile 2016

Events such as Brexit and the US election, coupled with stricter rules on OTC derivatives, could significantly boost listed futures trading.

Trading in futures is anticipated to increase significantly following several records at some of the world’s largest listed derivatives exchanges, with regulation set to play a key role in enticing traders.

According to data released by CME Group, it recorded over 3 billion futures contracts traded over 2016, up 11.1% in comparison to 2015. Similarly Eurex, Europe’s largest derivatives exchange, saw over 1.7 billion futures contracts traded, an increase of 3% year-on-year.

Meanwhile, interest rate swaps volumes cleared by CME in the US fell over the year, with 2016 seeing a notional volume of $26.6 trillion, down from $34.2 trillion the year before and $36 trillion in 2014.

Several volatile events such as Brexit and the US election drove futures trading in several asset classes, including interest rates, equity index and FX futures.

Furthermore stricter rules over OTC derivatives could further encourage traders to move to futures, particularly with the introduction of the variation margin rules in March this year.

“The introduction of margin requirements for bilateral instruments will make ETDs (exchange traded derivatives) more attractive. We will further develop our range of standardised exchange traded and cleared products,” says Thomas Book, CEO of Eurex and head of derivatives markets trading at Deutsche Boerse.

2017 will also see regulators highlight the implementation of stricter capital rules on banks. With the cost of capital playing a large factor in banks OTC derivatives business, they may drive their clients to use more cost-efficient futures products.

In an online blog Kevin McPartland, head of research for market structure and technology at Greenwich Associates says: “Investors will therefore be forced to look harder at more cost-effective cleared products. Product selection will expand beyond interest rates and energy into credit and FX—a good sign for futures market.

“With interest rates rising and more uncertain in 2017, the need for market participants to hedge and speculate will increase, further boosting futures volumes. Whether the growth in futures hurts the swaps market or the rising tide of interest rates lifts all boats is still to be seen.”