London-based derivatives exchange NYSE Liffe has reported volume growth in a number of key contracts, which it partly attributes to a move from swaps to futures ahead of new regulation.
NYSE Euronext-owned Liffe attained record monthly volumes in sterling futures and swapnotes – cash-settled futures contracts that reference the interest rate swap curve. Sterling options contracts grew 104% year-on-year, with 96,915 contracts traded in January 2013, compared to 47,572 in the same month last year, while the number of swapnote contracts traded reached 3,576 last month, 21% higher than January 2012’s 2,831 contracts.
According to John O’Neill, co-head of product development, fixed income, currencies and commodities, NYSE Liffe, the increase in swapnote volumes is largely down to its suitability as a hedging instrument compared to some OTC derivative products.
“Swapnote contracts are priced against the interbank curve and therefore offer a better hedge for swaps trading than government bond futures,” O’Neill told theTRADEnews.com. “Pre-crisis, the market assumed little difference between bank and government credit risk, but now the spread between them is far wider, calling for the use of new products to manage this exposure.”
But he added that the European market infrastructure regulation, new rules that will fundamentally change the way OTC derivatives are traded through the migration of many products to exchange-like platforms and central clearing obligations, are also driving the shift.
“Many market participants that have used swaps historically are reconsidering whether they need to continue using them. We are seeing more customers use swapnote as an alternative way of doing business,” said O’Neill. “The move to futures instead of swaps has already begun and we plan to further build this franchise as the implementation of new rules draws closer.”
In the US, which is already in the process of implementing its own OTC derivatives reforms under the Dodd-Frank Act, futurisation of swaps has been a hot topic, with the Commodity Trading Futures Commission holding a roundtable to discuss developments in this area two weeks ago.
Swap futures were introduced last year by the CME Group and IntercontinentalExchange – which is in the process of acquiring NYSE Euronext – for interest rate and energy derivatives respectively, initially as a way for some market participants to fall below the threshold of swap trading that requires swap dealer registration. US energy swap futures have drained liquidity from the OTC markets, but their use is still limited in the interest rate space.
NYSE Liffe also reported a record day in its flagship Euribor futures, contracts that reflect the European interbank lending market. Over 3.2 million Euribor futures contracts were traded on 25 January, higher than the previous recorded of 3.03 million contracts traded on 3 March 2011.
The record is attributed to the European Central Bank’s (ECB) long-term refinancing operation launched just over a year ago, which allowed euro-zone banks to deposit a wide range of collateral with the ECB in return for cash loans of up to three years.
Banks could only start repaying ECB loans a year after they were issued – 25 January 2013 – leading to a barrage of speculative trading relating to the health of European banks via Euribor contracts.
O’Neill added he expects Euribor volumes to grow further as more loans are repaid.