As regulations make over-the-counter swaps more costly for corporate end users, exchanges are coming out with exchange-traded swap futures contracts to provide an alternative. But the futures contracts may never match the flexibility that OTC swaps provide.
CME Group is launching deliverable interest-rate swap futures Nov. 13 that will provide exposure to a cleared interest-rate swap, along with the pricing transparency, cross-margining and margin savings of a standard futures contract. The IntercontinentalExchange shifted all of its cleared energy swaps to futures last week, and it plans to launch a credit-default swap futures contract early next year.
Futures standardization is the next big hurdle. Users must enter into CME’s interest-rate swap futures, for example, on specific dates in March, June, September or December. Callahan says that CME also offers weekly options on Treasury futures, which have been highly successful and provide some additional hedging precision, and that its cleared swap solution allows for customizing dates and the coupon.
Corporates haven’t been a key target for the CME interest-rate swap future so far because it is standardized and corporates typically hedge to exact dates, Callahan says. “There might come a point where they decide to accept the basis difference between the dates of their debt and the dates of the swap future, because it will be justified by the cost savings.”