CBOT Swap futures reduce the heavy administrative costs of trading plain vanilla swap exposure. All outstanding trades in Swap futures aggregate into a single line item.  Moreover, the guarantee of the CBOT clearing services provider mitigates credit risk by serving as the ultimate counterparty to all trades, making CBOT Swap futures comparable to the strongest credits in the OTC market. 

CONTRACT DESIGN

CBOT Swap futures employ an internal rate of return formula to express the fixed rate of a forward starting swap as the price of a 6% coupon bond. Upon expiration the contract is cash-settled to the appropriate ISDA^® (International Swaps and Derivatives Association, Inc.) benchmark rate. This rate is determined by a survey of swap dealers polled at 10:00 a.m.Chicago time, and posted at 10:30 a.m. Chicago time on the Reuters ISDAFIX3 page.

The $100,000 nominal size of each contract signifies the notional par value of an interest rate swap that exchanges semiannual fixed-rate payments for floating-rate payments.  The fixed payments are based on a 6% annual rate, and the floating payments are based on 3-month LIBOR (London Interbank Offered Rate).

Swap futures trade in price terms and are quoted in points ($1,000 per one point), 32nds of points ($31.25 per one 32nd), and halves of 32nds of points ($15.625).

As with CBOT U.S. Treasury Note and Bond futures, the expiration cycle for Swap futures is March, June, September, and December.

KEY BENEFITS

CBOT Swap futures provide many important benefits to the market participants, including:

Standardization

Because the terms of futures contracts are standardized, they specify the features and obligations of the agreement up front so that negotiations to buy and sell are based on price alone. 

Centralized Clearing

With the CBOT’s clearing services provider functioning as the ultimate counterparty to all transactions, swap futures allow uniform multilateral netting of credit risk. For many market participants, this entails fewer and lower regulatory barriers than the bilateral netting and/or collateralization agreements found in the OTC swap markets.

Convenience

Swap futures risk and price modeling can be managed with a simple spreadsheet, significantly reducing the administrative costs and liabilities (e.g., manpower and record-keeping costs) frequently required in maintaining a book of OTC swap contracts.  Moreover, the cash settlement feature of CBOT Swap futures means there are no trailing contractual obligations after the futures contract has expired.  Any financial obligations entailed in a CBOT Swap futures contract expire with the contract, after the final mark to market on the last day of trading.  In this way, Swap futures provide market participants with a clean vehicle to adjust swap rate exposure.

Transparency

Futures markets allow participants with differing information sets and outlooks to discover the equilibrium price of the moment. CBOT Swap futures prices, bid-ask spreads, and other transaction data are transparent to all market participants in real time, supplying the market with an unbiased reference point.  In addition, positions are settled daily to an official closing price, providing users with a transparent and uncontestable measure of contract value.

Anonymity

In order to trade CBOT products, market participants must have a brokerage agreement with a CBOT clearing member; transactions then clear between the clearing member and the CBOT clearing services provider, offering a layer of protection that not only guarantees customer credit, but also gives anonymity to the end user.

Unbiased Markets

The CBOT pools liquidity by providing a centralized market where buyers can meet sellers. The size and frequency of a participant’s trading activity does not factor into the quality of the market quote he observes.  Thus, market participants can use Swap futures to manage swap exposure in much smaller denominations than is either customary or cost-effective in the OTC swap market.

Cross Margining

The Common Clearing Link between the CBOT and the Chicago Mercantile Exchange (CME), the CBOT’s clearing services provider, aids investment managers in achieving more efficient allocation of capital.  Users of CBOT Swap futures who hold counter-positions in correlated futures contracts – CBOT Treasury futures or CME Eurodollar futures, for example — enjoy substantial reductions in performance bond (margin) postings.

Off-Exchange Trading

CBOT Swap futures are eligible for a wide variety of off-exchange negotiated transactions.  These include:

• Exchange-For-Physical(EFP) trades, in which a buyer acquires Swap futures from a seller at a mutually agreeable price.  At the same time, the futures buyer sells (and the futures seller buys) an equivalent amount of cash-market securities for which the price dynamics are reasonably correlated with that of Swap futures.

• Exchange-For-Swap(EFS) trades, which are similar to EFP trades, except that the buyer of Swap futures enters into an over-the-counter interest rate swap in which he is a fixed-rate payer.  Conversely, the seller of Swap futures takes the other side of the OTC interest rate swap as a fixed-rate receiver.  The notional amount of the futures position is approximately equivalent to the notional amount of the OTC interest rate swap.

• Exchange-For-Risk(EFR) trades, which are similar to EFS trades, except that the buyer of Swap futures enters into an over-the-counter option position with a delta that is positively related to the level of swap rates (e.g., he is either a purchaser of a fixed payer swaption or a seller of a fixed receiver swaption).  The seller of the Swap futures takes the other side of the OTC option transaction (e.g., he is either a buyer of a fixed receiver swaption or a seller of a fixed payer swaption).  The DV01 of the futures position is approximately equivalent to the delta of the OTC option.

•Wholesale trades, in which a buyer and seller can bilaterally transact a position in Swap futures, at a negotiated mutually agreeable price, as long as the scale of the futures transaction is large enough to qualify for consideration as a wholesale trade.

For more information on CBOT Swap futures, contact:
Steve Dayon, CBOT Business Development, 312-435-7225

The content in this presentation is proprietary to the Board of Trade of the City of Chicago, Inc. (“CBOT”), and may not be disseminated to any third parties without the express written permission of the CBOT.  While the information contained in this presentation is believed to be reliable, it is intended for purposes of information and education only and is not guaranteed by the CBOT as to accuracy, completeness, nor any trading result, and does not constitute trading advice or constitute a solicitation of the purchase or sale of any futures or options.  The Rules and Regulations of the Chicago Board of Trade should be consulted as the authoritative source on all current contract specifications and regulations.

©     Board of Trade of the City of Chicago, Inc., 2006   ALL RIGHTS RESERVED.