The success of new swap futures products could be decided by their ability to provide capital efficiencies, according to industry experts, after a recent spate of growth in the market’s offerings.
A flurry of the new hybrid contracts has hit the market over the past three years though the market has yet to fully ignite as participants continue to weigh up their use against cleared swaps. For those trading and clearing both products through the same central counterparty the opportunity may arise for lucrative and cost-saving cross-margining prospects.
According to Ben Larah, manager, Sapient Global Markets, the ability to offer these margin offsets could decide which products are the most actively traded.
“The ability to offer margin offsets on products is one of the most distinguishing factors to determine which swap future will be successful,” said Larah.
“When considering your choice of products you have to consider the entire universe and decide if your operational model fits in with what the clearing house offers.
The initial swap futures products in the market were courtesy of Eris Exchange and CME Group, with the former using its own methodology and CME using a Goldman Sachs-patented method.
In recent months, Eris has licensed its methodology to Intercontinental Exchange and the Montreal Exchange, as those venues look to launch products of their own using the existing model.
The swap futures market is in its early stages of life, however the adoption of the products by some of the world’s largest futures exchanges points to potential for growth.
“This doesn’t stop Eris making their own markets, but it is great for them having ICE with their three different time zones,” said Steve Woodyatt, CEO of ObjectTrading.
“This comes back around to capital and key efficiencies theme, which is a big theme for the buy-side.”
Similar to the Eris deals, new platform GMEX also announced a deal whereby German exchange Eurex will list and clear its constant maturity swap futures. Eurex has also listed its own swap futures with the intention of building out its cross-margining capabilities.
GMEX and Eris were both start-ups driven by innovating a swap futures contract and have made smart moves by linking up with major incumbents. Along with cross-margining capabilities these partnerships could also help spur the innovative products.
“The Eris and ICE agreement is very similar to the deal with GMEX and Eurex with this theme of licensing,” added Woodyatt.
“You could say that this has helped defragment the markets with innovative products.
“The interesting thing is the GMEX constant maturity futures is that you still have to mark-to-market simplicity, and the efficiency of computerised platform still with its simplicity.”
Larah agreed that the moves could be lucrative, adding that Eris won’t be jeopardising its own offerings by licensing the product to other exchanges.
“With Eris you have US dollar Libor swaps, but when Eris licenses these two partners, what they are doing is licensing their intellectual property to do products which are different. The Montreal swap futures will be a Canadian product based on CDOR [The Canadian Dollar Offered Rate]” he added.
“There is no existing Eris product that does that so it is not going to cannibalise Eris Exchange products. This is an advantage for Eris, because the product IP can be licensed and be lucrative.”