The FINANCIAL — A pair of Chicago-based futures exchanges are planning to allow customers to use the same capital to backstop offsetting positions in different kinds of interest-rate derivatives traded on their separate exchanges.
The arrangement between CME Group (CME) and Eris Exchange, designed to save customers money, will let traders offset Eurodollar interest-rate futures and Treasury futures traded on CME against interest-rate "swap futures" traded on the Eris platform. They plan to start offering the service May 7, according to an advisory sent out late Friday by CME.
A number of clearinghouses, including CME Group, LCH.Clearnet Group, New York Portfolio Clearing and the Depository Trust & Clearing, have focused on these so-called "margin offsets" in recent months as way to bolster their offerings at a time when customers fear that new trading and processing rules will increase their cost of doing business.
Eurodollar futures are widely used for hedging moves in short-term interest rates, while Treasury futures are more commonly used to hedge changes in long-term rates. Eurodollar futures specifically are linked to anticipated changes in interest rates on dollar deposits held offshore, as measured by the London interbank offered rate, a benchmark for what banks charge one another to borrow dollars.
The swap futures from Eris, which are cleared by CME Clearing, are a sort of hybrid between a futures contract traded on exchange and a privately traded, over-the-counter derivative or "swap." The dollar-denominated "swap futures" trade and clear like a futures contract, but replicate the cash flows of a swap, according to Eris.
Offsetting exposures that mimic interest-rate swaps against listed futures should free up large amounts of capital based on the high volumes of the futures contracts outstanding at CME. "Actual risk offsets vary by portfolio, but can reach as high as 95% for highly correlated positions," CME Clearing said in its advisory notice.
According to Borsa Italiana – London Stock Exchange Group, the service will be made available to banks and customers as of the same date.
LCH.Clearnet, New York Portfolio Clearing and the DTCC announced in March they would provide relief for customers by allowing their collateral to qualify across exchange-traded interest-rate futures; over-the-counter, or privately traded, interest-rate swaps; and cash bonds and repurchase agreements.