Investors flock to Treasury futures for off-balance sheet exposures

Demand for exposure in US Treasuries is shifting from the cash market to futures, following stricter banking regulations.

Growth in US Treasury futures is outpacing cash Treasury trading as investors look to increase their off-balance sheet exposure to US fixed income markets.

According to recent data from the CME Group, which controls the market place for Treasury derivatives trading, Treasury futures percentage penetration of cash market volumes had risen to 77%, up from 56% in 2012.

The study from the Chicago-based exchange group explains that the rise in demand for futures is due to investors looking for off-balance sheet exposure in the Treasury market, following stricter banking regulations.

Speaking to The Trade Derivatives, Agha Mirza, global head of interest rate products at CME Group, said: “This is primarily driven by a desire among market participants to realise the efficiencies of off-balance sheet standardised instrument.”

While average daily notional volume is cash Treasuries is higher than futures volumes, it has decreased by almost $50 billion since 2012, whereas notional volumes in Treasury futures increased by over $50 billion.

Furthermore data from CME Group show that asset managers hold on average weekly long open interest in Treasury futures of 3.5 million.

Mirza also suggested that the move from request-for-quote (RFQ) trading of cash bonds to centralised central limit order book (CLOB) trading of standardised futures products.

Earlier this year, CME Group launched the ultra-10 year Treasury note futures contract, which is now its fastest ever growing product, trading over 4.5 million contracts in just five months.

US Treasury markets are facing increased scrutiny, as regulators hope to gain a deeper understanding of the participants and types of activity that go on in the market.

Speaking at the FIA Boca conference in March, Mike du Plessis, managing director and global head of execution services as UBS said: “The Treasury market is being looked at closely. It will be transformed. It’s just that there is so much change hitting so many people so fast that the ability of the market to build out its fabric is constrained.”

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