The Futurization of the Swaps Market: Players, Products and Collateral

Finadium
March 2013

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Swap futures have introduced a new variable into financial markets with potentially broad impacts for risk and collateral management. These products take the functionality of OTC derivatives and standardize their trading for futures markets, leaving behind both bilateral swap transactions as well as new Dodd-Frank regulations for Swap Execution Facilities (SEFs) and centrally cleared OTC derivatives.

The major derivatives exchanges, as well as banks, clearing firms and new SEFs, are promoting new models for OTC derivatives trading in what is emerging as a major market opportunity. The conversation has focused on the US$379 trillion interest rate swaps market. Some exchange complexes that have relied on a vertically integrated futures solution now see the OTC derivatives market, with its emphasis on horizontal models, as a disadvantage. Meanwhile, new SEF entrants and banks want to maintain their competitive positioning and not lose out to the futures markets.

This report looks at the business of the futurization of swaps including major players and business opportunities. We evaluate the main competitors in OTC and futures trading and clearing, their business models and how their interests are determining future directions for the OTC and swap futures markets. While regulators and exchanges are making many of the decisions that affect the groundwork for the futurization of swaps, end-users and clearing members will need to understand the ramifications of these products to make successful investment decisions.

This report should be read by OTC derivative market participants, in particular interest rate swap users and service providers. The report has particular relevance for clearing firms, exchanges and CCPs in futures and OTC derivatives.

This report is 29 pages with 8 exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ From Bilateral to Cleared to Swap Futures

■ Sizing the Market for OTC Derivatives Trading as Futures

■ The Competitive Positioning of US Exchanges and SEFs
– The CME
– Eris Exchange
– IntercontinentalExchange (ICE)
– The SEFs

■ The Impact of Block Trading Rules

■ Cross-Margining and Collateral Savings
– The Collateral Impact

■ Final Observations and Directions from Regulators

■ About the Author

■ About Finadium