OneChicago, the US single stock futures exchange, released the news last week that its volumes through August had almost exceeded volumes for all of 2011. Meanwhile, NYSE Liffe’s Repo Futures market also had a good month in August, with outstanding open interest on its Treasury GCF futures gaining handily from the July 16 launch. This prompts the question, are rising volumes for equity finance products a one time event or is the market warming to these products, each for their own reasons?
First, the numbers. OneChicago reported year to date volume through August 2012 of 3,387,320 contracts, up from 2,435,336 in August 2011. This is an increase of 39%. In all of 2011, OneChicago traded only 3,679,484 contracts; they should pass this figure in September. Volumes for this August over last year were down a bit, but open interest was up 37%. The most interesting figure to us was from June 2012, where volumes were up 221% over the prior year. We asked OneChicago if there was anything special to keep in mind about the June number besides quarter end, and they said no, this was business as usual. That’s an impressive jump in volumes.
For NYSE Liffe, the same facts and figures as shown for OneChicago would be misleading, given that the GCF Repo Futures (TM) are still very new. Nevertheless, volumes are up, particularly for the treasury repo futures. By August 28 treasury repo open interest hit 25,277 contracts (73% increase over July), and mortgage repo was at 2,152 (a 69% increase). Trading in the treasuries is doing well, about the same volumes as in July, while agencies and mortgages have seen a number of days when no contracts traded. Still, it being summer and all, we think that the GCF Repo Futures have done all right.
It would be tempting to generalize the growth in both products and say that interest in managing financing costs using futures is up, but we don’t see that as being the case. Rather, OneChicago is benefitting from some specific tax and Dodd-Frank rules. For Single Stock Futures, a Jan 19 2012 Treasury proposal (with temporary rules now in effect) suggested that the implied dividend pricing in the OneChicago IC contracts are not a “dividend equivalent.” This is a big deal – no dividend tax payments will be required for revenue on this type of contract for non-US investors. The matter is summarized in this article from Saratoga Capital on our Asset Ops and Strategy site. OneChicago’s SSFs are also looking good from a Dodd-Frank standpoint: they are cleared on the OCC, hence banks get CCP capital allocations and may benefit from cross-product margining on other OCC-cleared products.
Repo Futures on the other hand are a potentially big beneficiary from the massive LIBOR blowup. The GCF indices (TM) calculated by the DTCC are based on actual GC repo transactions, and the NYSE Liffe futures are a natural hedge. We detailed the rationale for why repo futures are a winner in our August 2012 report, Repo Futures, Overnight Index Swaps and Other Alternatives to LIBOR. If the Fed insists on keeping up its 25 bps payments for Interest on Excess Reserves, and the FDIC keeps up its tax, then the Fed Funds market will be kept down for the count, leaving repo futures again as a viable index alternative.
In sum, we’re not ready to say that rising volumes in single stock futures and repo futures mean that the world is accepting financing more readily, but this is good news for those consider these products to have promise in the market for their own reasons.
For the regulatorily-minded, here’s a fuller write up of the US Treasury’s dividend equivalent ruling.