Euro Deliverable Swap Futures
Now Available for Trading
Contents
•
Introduction to CME Group
•
Overview of Euro Deliverable Swap Future (DSF)
•
Success of USD DSF Contract and OTC Swaps
•
Euro DSF Details
•
Next Steps
2
CME Group: Who We Are
CME Group is the world’s leading and most diverse derivatives exchange. It’s where
companies, institutions and individuals from around the globe come to manage their
business risks, hedge against fluctuations and protect themselves against price
volatility.
Our Global Reach
ACCESS IN
150
CONNECTIONS THROUGH
Countries
11
Global
Hubs
RELATIONSHIPS WITH
12
Partner
Exchanges
3
Euro DSF Product Overview
Liquid Means of Managing Rate Exposure
• Euro Deliverable Swap Future will launch on April 14th, 2014
• Euro-denominated quarterly IRS contracts expiring on IMM dates for key benchmark
maturities (2, 5, 10 years)
• At expiration, all open positions deliver into CME Group Cleared Euro Interest Rate Swaps
• Complements CME Group’s market-leading Interest Rate Futures and Options business
and Cleared OTC Swap Offering
• Builds off the success of the USD Deliverable Swap Future
• Citi, Societe Generale and Nomura are among the firms that plan to serve as market
makers
Capital Efficiencies Through a Standardized Product
• Economic exposure to interest rate swaps with the simplicity, transparency and
margin efficiency of a future
• Standardized futures products offering lower margins than OTC swaps
• Flexible execution via CME Globex, Block trades and EFRPs
• OTC trading advantages including:
• Ability to block calendar spreads
• Lower block thresholds and longer reporting times
• No block surcharges
4
USD DSF Success Spurs Euro Product Expansion
•
Strong Growth in the first year of
US dollar-denominated DSF
•
•
•
•
2nd fastest growing IR Futures
product in CME Group history
1.75 million contracts cleared since
launch, representing $175 billion in
notional
Open interest reaching a high of
114,000 contracts
Record: 37 and 50 open interest
holders in the 5y and 10y USD
DSF
•
Driven by Client Demand for margin
efficient alternatives to swaps
•
Leveraging the #1 IRS clearing
house in global client open interest
•
ADV
14,000
USD DSF MARKET ACTIVITY
Open Interest
140,000
12,000
120,000
10,000
100,000
8,000
80,000
6,000
60,000
4,000
40,000
2,000
20,000
0
0
Non-Roll Period ADV
Roll Period ADV
Open Interest
Euro swaps OI exceeding €2 trillion
5
Margin Efficiency through Standardisation
DSFs offer capital savings via lower margin levels
By trading a swap versus Deliverable Swap Future package(1), portfolio managers can migrate
their most vanilla OTC positions to DSF and optimise margin use.
Other Benefits Include:
•
•
•
Trading directly through the Central Limit Order Book or as Block Transaction2 with your
Executing Brokers3
All open positions at expiration will be delivered into a CME OTC Cleared IRS or one can choose
to roll the position into the next delivery month
Standardised futures products attract lower levels of margin by virtue of limited line items and
ease of default management
Indicative Margin Example(4) for 10 year exposure in Euros and US dollars
•
•
Long/Received
Short/Paid
10 Year
Margin
€75m 10y DSF
$100m DSF
Gross Margin
IRS
DSF
Savings
2.45%
1.50%
39%
2.70%
1.95%
28%
5.15%
3.45%
USD/EUR spread
Spread margin
(% of 200m USDE)
1.17%
0.53%
55%
Outright positions achieve approximately 30% savings
Cross market USD/EUR position achieves approximately 50% savings
Exchange For Swap (EFS) also known as Exchange For Related Product (EFRP)
Subject to minimum block threshold and 15 minute reporting time
(3) Block market makers for Euro DSF expected to include Citibank, Nomura, Societe Generale, Morgan Stanley, Credit Suisse and RBS
(4) Indicative margins as of March 2014 for illustrative purposes only
(1)
(2)
6
Contract Specifications
European Deliverable Swap Futures
Reference Tenors
Delivery Months
Contract Fixed Rate
Price Basis
Contract Size
Minimum Price Increment
Last Trading Day
Trading Hours
• 2, 5, 10 Year
• March Quarterly Cycle (March, June, Sept, Dec)
• Set by the Exchange when a futures contract is listed for trading, as a rate per annum with 30/360
day count fraction, at an integer multiple of 25 basis points per annum.
• 100 points plus NPV of deliverable grade IRS
• €1,000 per point (€100,000 per contract)
Reference Tenor
Minimum Price Increment
Per contract
Block
Threshold*
2-Year
0.005 points (€5 per contract)
1,500
5-Year
0.01 points (€10 per contract)
750
10-Year
0.01 points (€10 per contract)
500
• Second TARGET settlement day before 3rd Wednesday of futures Delivery Month
• CME Globex: 23:00 PM GMT to 22:00 GMT, Sun- Fri
• Trading in expiring futures terminates at 5:15pm CET on Last Trading Day
Tickers
Matching Algorithms
CME Ticker
Secondary Ticker**
2 Year
T1E
T2E
5 Year
F1E
F2E
10 Year
N1E
N2E
Outrights
Calendar Spreads
FIFO (F)
Pro Rata (K)
* Block reporting time is 15 minutes
** In the cases when interest rates move dramatically, CME may list a second contract with a notional coupon rate that matches current market rate.
© 2013 CME Group. All rights reserved.
7
Euro Deliverable Swap Futures Details
Delivery Day
• First CME Clearing Business Day before 3rd Wednesday of Delivery Month
Delivery
Standard
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Fixed Rate Payer
Floating Rate Payer
IRS Effective Date
Currency
Notional Amount
Business Day(s)
Business Day Convention
Termination Date
Fixed Rate Payment Dates
Fixed Rate
Fixed Rate Day Count
Floating Rate Payment Dates
Floating Rate Option
Designated Maturity
Spread
Floating Rate Day Count
Compounding
Short Futures position holder making delivery
Long Futures position holder taking delivery
rd
3 Wednesday of Delivery Month = Delivery Day
EUR
Futures Contract Size= €1,000 per point (€ 100,000 per contract)
TARGET
Modified Following
Anniversary of IRS Effective Date at Futures Reference Tenor
Annually, from IRS Effective Date
Contract Fixed Rate
30/360
Semiannually, from IRS Effective Date
EUR-EURIBOR-Reuters
6 Month
None
Actual/360
None
Delivery
Method
• Physical delivery of IRS that meets Delivery Standard.
• Delivery Day, Clearing Acceptance Date, and Clearing Effective Date =
First CME Clearing Business Day preceding 3rd Wednesday of Delivery Month.
• Delivery invoice price =
IRS Initial Payment Amount, as determined by contract final settlement price, P:
• If 100 < P, IRS Floating Rate Payer pays € 1,000 x ( P – 100 ), rounded to nearest cent.
Else, IRS Fixed Rate Payer pays € 1,000 x (100 – P ), rounded to nearest cent.
Delivery
Eligibility
• To participate in physical delivery, a Futures position holder must be an Eligible Contract Participant
(17 CFR1.3(m) and CME Rule 90005.C.) and must be registered with CME by a CME IRS Clearing
Member as an IRS Participant (CME Rules 90005.A. and 90005.B.).
© 2013 CME Group. All rights reserved.
8
Pricing & Payment Details
Price & Payment
• The Deliverable Swap Futures pricing convention is similar to that of CBOT Treasury Note and Bond
futures, with prices quoted in points with par equal to 100 points
• Calculated as ∆ in 1 basis point x €10 x position
• Fixed Rate Payment date is semi-annual based on the effective date
• Floating Rate Payment date is quarterly based on the effective date
Price Alignment
Interest
• As a futures contract, Deliverable Swap Futures will not receive PAI
• Upon delivery of the futures, the resulting Cleared OTC IRS contract will be subject to PAI
Daily Settlement
• Daily Settlement prices for Deliverable Swap Futures are set based on trading activity on CME Globex at 5:15
CET (Central European Time)
• Cleared OTC IRS valuation is based off closing curves, which include OIS discounting
• Like many futures products, prices for Deliverable Swap Futures can diverge from those observed in the
underlying swaps curve, dependent upon the conditions of price discovery in each venue
Final Settlement
• Final settlement prices are based on market activity on CME Globex
• It settles to a volume-weighted average price (VWAP) of trades on Globex at 5:15 CET (Central
European Time)
Notional Coupons
• Notional Coupons for new contract listings will be announced on or about the First Business Day of March,
June, September and December. New, deferred contracts will be made available for trading on the last trading
day of the front expiring contract
• Fixed rates for DSF contracts shall be determined by the exchange and published on our website.
• In the cases when interest rates move dramatically, CME may list a second contract with a notional coupon rate
that matches the a new, current interest rate
© 2013 CME Group. All rights reserved.
9
Eligibility & Delivery
• There are no special requirements that must be met for a futures account to trade Deliverable
Trading Eligibility
Swap Futures
• All CME Clearing Members can clear the futures contract, whether an IRS Clearing Member or
not
Delivery*
• To take delivery, a Futures position holder must be an Eligible Contract Participant and must be
registered with CME by a CME IRS Clearing Member as an IRS Participant
• CME will require firms to report delivery intent on each of the last 5 business day prior to
expiration
• The Last Trading Date for the future is the Monday before IMM Wednesday date. The actual time
when the last trade on the future is allowed is 2:00 PM CT
Transfers
• Transfers of futures position are allowed after the last trading time until 7:00 PM CT
• There is a transfer fee of 10 cents per side of Futures positions prior to delivery and the transfer of
swap trades post-delivery is free
Matching at Delivery
• At the time of delivery, the total quantity of long positions will equal the total quantity of
short positions, which equates to an equal number of PAY and REC Cleared Interest
Rate Swaps after delivery
• When the entire delivery is complete Clearing House will be flat and respective PAY and
REC swaps will be in the Cleared OTC IRS Accounts, with CME as the legal
counterparty for each trade
*An IRS Clearing Member carrying an account that is required to make or accept delivery on an expiring futures contract shall guarantee and
assume complete responsibility for the performance of all delivery requirements set forth in the Rules
© 2012 CME Group. All rights reserved
10
Delivery Example
Variation and Initial Margin Movements
MONDAY
FUTURES
• Last Trading Day
MONDAY
TUESDAY
• Last VM movement
• Position expired
TUESDAY
• Position created
OTC
WEDNESDAY
• IM released
WEDNESDAY
• First IM movement
• First VM movement
• Monday:
•
•
This is the last trading day for the Futures contract; it then will
deliver into a swap
Tuesday:
The Futures position expires and an OTC position is created
Wednesday: The Futures initial margin is released, and the first initial margin and
variation margin moves for the OTC interest rate swap
•
Long Positions are converted into receive-fixed swaps
• Short Positions are converted into pay-fixed swaps
11
Cash Flows Example
Action
Details
Cash Flows
Contract
Listing
• CME sets the fixed coupon at 1.75% the week before the
contract begins trading
• N/A
Trade
Execution
• 2 days before the contract expires, Client buys 100 Swap
Futures at 100-02 and the contract closes at 100-04
• Client receives positive VM of (100-04 - 100-02)*10*100 =
€2,000 for the Swap Futures
Daily
Settlement
• 1 day before the contract expires, contract closes at 100-16
• Client receives positive VM of (100-16 - 100-04)*10*100 =
€12,000 for the Swap Futures
Final
Settlement
• On the day of expiration, the Swap Future closes (expires) at
100-16
• No VM from the Swap Futures (100-16 - 100-16)*10*100 = €0
• Absent market movements, no cash flow occurs at the
delivery of the IRS, and the swap has an NPV of zero.
Physical
Delivery
• Client is delivered into a cleared IRS with the following
details:
• Notional: €10 million
• Direction: Client Receives Fixed
• Maturity: 10 years
• Fixed Rate: 1.75%
• Upfront payment: Client Pays €16,000
• The amount that the Swap Future is above par is structured as
an upfront payment in the swap (100-16 - 100)*10*100 =
€16,000 for the upfront payment
• The client is receiving 1.75%, which is 5.376 bp above the
approximate market swap rate of 1.6962%.
• The amount of the upfront payment is offset by the amount the
swap rate is above market, resulting in no net cash flow for
the Client during its first IRS settlement.
12
Final Settlement Price
What does the final settlement price represent?
The contract’s final settlement price:
Represents the amount of money a market participant would be willing to pay or require to receive in return for taking delivery of
the underlying referenced interest rate swap contract
In the event prevailing swap rate are below the coupon rate reference by the futures contract:
•
•
Futures
•
The final futures price will be above par
•
Total futures PNL will be the difference between the final futures price and the trade price
OTC
•
Long futures position holder will receive fixed at the underlying rate referenced by the futures contract
•
Long futures position holder will pay a euro sum equal to the amount of the final futures price minus par
In the event prevailing swap rate are above the coupon rate reference by the futures contract:
•
•
Futures
•
The final futures price will be below par
•
Total futures PNL will be the difference between the final futures price and the trade price
OTC
•
Long futures position holder will receive fixed at the underlying rate referenced by the futures contract
•
Long futures position holder will receive a euro sum equal to the amount of the par minus the final futures
price
Next Steps
How to get ready for EUR DSF?
Clearing Readiness Checklist
 Check with your Clearing Member(s) and liquidity
provider(s) on their status for DSF
 Internal Product approval to trade
 Internal Readiness to Trade/Clear the Product
 Market Access:
 Globex
 Blocks
 Operational Readiness
 Risk/PNL Reporting
 Test in New Release
© 2013 CME Group. All rights reserved.
14
Vendor Codes
For primary coupons
Tenor
Sept-2014
Coupon
Rate
CME
Tickers
Bloomberg
(Trading
Technologies)
Esign
al
CQG
Thomson
Reuters
DTN
2-Year
0.75%
T1EU4
PTEA
T1E
T1E
T1E
0#T1E
@T1E
5-Year
1.50%
F1EU4
PFEA
F1E
F1E
F1E
0#F1E
@F1E
10-Year
2.25%
N1EU4
PNEA
N1E
N1E
N1E
0#N1E
@N1E
TT
© 2013 CME Group. All rights reserved.
15
Block List Contacts
Below is a list of firms that have volunteered as contacts for clients interested in EUR DSF block
trades. Many other market makers are willing to engage in block transactions.
Firm
Contact Name
Email
Phone Number
Nomura
Philipp de Cassan
Noel Durlacher
[email protected]
[email protected]
+44 20 7103 0229
+44 20 7103 3017
Citibank
Jason Cohen
[email protected]
+44 20 7986 2768
Société Générale
Matthieu Legigan
James Von Dadelszen
[email protected]
[email protected]
+44 20 7676 7468
Morgan Stanley
Chris Stone
[email protected]
+44 20 7677 7826
Credit Suisse
Oliver Herregods
[email protected]
+44 20 7888 9212
© 2013 CME Group. All rights reserved.
16
For More Information
To learn more about Deliverable Swap Futures, visit
cmegroup.com/dsf or contact a member of our product team:
London
David Coombs
[email protected]
Executive Director, Interest Rate Products
+44 20 3379 3703
Chicago
Kaitlin Meyer
[email protected]
Senior Analyst, OTC Products & Services
312-648-4353
Liam Smith
[email protected]
Director, OTC Product Solutions
+44 20 3379 3850
Ted Carey
[email protected]
Business Analyst, Interest Rate Products
312-930-8554
Singapore
Malcolm Baker
[email protected]
Senior Director, Interest Rate & FX Products
+65 6593 5573
© 2013 CME Group. All rights reserved.
17
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and
because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of
money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without
affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot
expect to profit on every trade.
Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who
are eligible contract participants (ECPs) within the meaning of section 1(a)18 of the Commodity Exchange Act. Swaps
are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to
lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they
can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade
because they cannot expect to profit on every trade.
The Globe Logo, CME®, Chicago Mercantile Exchange®, and Globex® are trademarks of Chicago Mercantile
Exchange Inc. CBOT® and the Chicago Board of Trade® are trademarks of the Board of Trade of the City of Chicago.
NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange, Inc.
COMEX is a trademark of Commodity Exchange, Inc. CME Group is a trademark of CME Group Inc. All other
trademarks are the property of their respective owners.
The information within this presentation has been compiled by CME Group for general purposes only. CME Group
assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy
of the information within this presentation, CME Group assumes no responsibility for any errors or omissions.
Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and
should not be considered investment advice or the results of actual market experience.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME,
CBOT, NYMEX and CME Group rules. Current rules should be consulted in all cases concerning contract
specifications.
© 2013 CME Group. All rights reserved.
18