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A Global Trading Summary of Interest Rate Markets
» Highlights
» Volume and Trends
» New Products and Enhancements
First Quarter 2014
Quarterly Interest RateReview
How the world advances
INTEREST RATES
Quarterly Interest Rate Review – First Quarter 2014
1
FIRST QUARTER HIGHLIGHTS
Interest Rate Options Growth– ADV +56% (1.42 million/day) vs. Q1 2013, 31% electronic
Treasury options: 603,494 in ADV, +18% vs. Q1 2013, 58% electronic
Weekly Treasury options: 49,674 in ADV, +81% vs. Q1 2013 — 20 million+ contracts since Jan 2011 launch
Eurodollar options: 822,222 in ADV, +106% vs. Q1 2013
Eurodollar Mid-Curve Options: Record 2.9 million contracts traded March 20 (vs. 2.6 million on June 24, 2013)
Weekly Eurodollar Mid-Curves options: 170,000+ contracts traded since November expansion
New Single-Day Record in Eurodollar Futures Trading
• Record 6.1 million contracts traded March 19, 2014, vs. 5.9 million contracts on June 24, 2013
2.48 million in ADV, +35% vs. Q1 2013
Deliverable Swap Futures (USD) – Strong Volume and Open Interest Growth
Single-day record 82,413 contracts ($8.2 billion notional) traded on March 11, 2014
Record 192,758 contracts ($19.3 billon notional) traded for the week of March 10
Q1 ADV of 6,297 contracts ($629 million in notional per day), +100% vs. Q12013
Momentum Builds in Ultra T-Bond Futures and Options
Ultra T-Bond futures: 103,261 in ADV, +22% vs. Q1 2013
Ultra T-Bond options: 479 contracts in ADV, +82 % vs. Q1 2013 (averaged 1,159 a day in February)
Cleared OTC IRS – We’re the Best Partner for You
$149.8 billion in average daily cleared IRS volume with over $12.5 trillion in global client open interest (as of March 26, 2014), with a record of $263 billion traded on March 19
Customers capitalizing on portfolio margining of Cleared OTC IRS vs. Eurodollar and Treasury futures (USD and non-USD portfolios) are saving on average over 40% through risk and margin offsets
Eight Clearing Members are now live with portfolio margining and over 30 customers accounts are already benefiting from this scalable solution
OTC Credit Default Swaps: Record $18 billion in notional cleared vs. $14 billion notional on March 20, 2012
For the latest news and product information, visit cmegroup.com/interestrates
cmegroup.com/interestrates
2
QUARTERLY OUTLOOK Market Insights with CME Group Chief Economist Bluford Putnam
The debate over when the Fed will move to increase the target federal funds rate is starting to come into focus given that the Federal Reserve’s quantitative easing (QE) program is on track to come to an end in the fourth quarter of 2014. Ending QE is a necessary step, since to raise the target federal funds rate, the Fed will need to be draining reserves and not still buying more assets. With the end of QE firmly in sight, however, this puts the spotlight on the Fed’s new approach to forward guidance.
While many analysts were writing about how a Yellen Fed would simply be Bernanke version 2.0, they could not have been more wrong. Our contrarian view, published in early January in Forbes, “Three reasons the Yellen-Fed will be different” (www.forbes.com/sites/realspin/2014/01/22/three-reasons-the-yellen-fed-will-be-different/) was proven right in March at the very first FOMC meeting with Yellen holding the gavel. Yellen is going with a much more nuanced approach, leaning heavily toward an emphasis on labor market developments to explain how economic developments are likely to impact Fed thinking.
Specifically, the Yellen Fed moved quickly to put some distance between its approach to forward guidance and
that of the Bernanke era. Bernanke had tried time-stamped guidance in the second round of quantitative easing several years ago. When he realized that was a mistake, he moved to indicator-based guidance, setting in late 2012 the achievement of an unemployment rate of 6.5% as a key objective. Many market participants instantly thought the 6.5% rate should be interpreted as a trigger for policy change, so Bernanke had to immediately backtrack and explain that was not so; it was just an objective, which if achieved would merely contribute to the discussion of future policy. (See our report anticipating the guidance shift, “Fed Forward Guidance in the Spotlight”, from 6 March 2014, www.cmegroup.com/education/featured-reports/fed-forward-guidance-in-the-spotlight.html).
The Yellen-Fed is taking a much more comprehensive view of the relationships among labor market
developments, the economy’s long-run potential real GDP growth, and the possibility of future inflation. That is, unlike a few of the monetarist leaning FOMC members, Yellen and a majority of the FOMC members are of the mind that as long as there is material slack in the US labor markets, then the likelihood of inflation pressures developing are quite low. Moreover, Yellen’s discussion of labor markets moves decidely away from the one number approach and examines a wide variety of factors including unemployment duration, participation rates, and turnover rates.
While the guidance from the Yellen-Fed is more nuanced, in many ways it provides much more clarity for the
markets. What the Bernanke Fed did not appreciate is that what really matters for market participants is the overall tone of the Fed’s assessment of the economy – is the economy in need of emergency life support (i.e., QE), or is growth on a solid track, and what are the inflation prospects? Of note, and the main reason we think US equities set new records and ignored the tightening implications of a withdrawal of QE and the upward shift in bond yields in 2013 was that the important message that came through loud and clear was that the Fed had finally become much optimistic about growth prospects for the economy.
Yellen still believes that the US economy has considerable slack in its labor markets, meaning inflation will
remain tame and the target federal funds rate can be left near-zero after QE ends. Our own research suggests that the private sector labor markets are actually tighter than the Fed’s view. We also believe that as the economy grows at healthy pace in 2014, the Fed will more and more want to get back to typical interest rate policy questions and may move sooner rather than later in 2015 to shrink its balance sheet, withdraw excess reserves, and target a higher federal funds rate.
For more of Blu’s views and commentary, visit cmegroup.com/putnam All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
Quarterly Interest Rate Review – First Quarter 2014
3
PRODUCT OVERVIEW
EURODOLLARS
Eurodollar Futures: Significant Increase in Asset Manager-Held Long Open Interest Asset Managers are increasingly turning to Eurodollars Futures as tool to manage their investment portfolios.
1st half of 2013: 12% of total O.I. (averaging 1,144,872 positions)
By December 2013: 22% of total O.I. (averaging 3,039,588)
Source: CFTC Commitment of Traders Reports
ED deferred contracts offer capital-efficient substitutes for OTC IRS
In December, O.I. in 3rd year of the yield curve (“green” month Eurodollars) briefly surpassed “white” month Eurodollars for the first time in history.
Activity was concentrated in the Dec 2015 expiration – which in December, rolled into “red” month contacts and fell out of the “green” month bucket, resulting in the drop in “green” open interest.
The Dec 2015 contract currently has 1.2 million contracts in O.I. — the single largest O.I. of any Eurodollar contract currently trading.
March 19, 2014 was a record volume day for “green” Eurodollar contracts of 1.83 million contracts, surpassing the previous record of 1.50 million contracts (September 18, 2013).
cmegroup.com/interestrates
4
PRODUCT OVERVIEW
EURODOLLAR OPTIONS
TREASURIES
Improving First-Level Depth in Ultra T-bond Futures
One measure of the liquidity is the depth available at the first level, which has improved substantially in Ultra T-Bond futures:
Avg. book size through March 2014: 125 contracts at 1 tick wide
Avg. books size, 2013: 48 contracts at a slightly wider bid/ask spread
ADVs continue to grow. Q1 YTD ADV is now 103K, a 22% increase from 2013.
Open Interest Split between Calls/Puts
Open Interest Split by Color Group CME Eurodollar Complex -- The Clear Choice to Express Views on FOMC Policy
Over the last 12 months, open interest in Eurodollar options has doubled. This increase is being driven by Fed tapering, which in turn has market participants more focused on the short end of the rates curve
Total open interest in Eurodollar options (both quarterly and Mid-Curve expiries) now exceeds 20 million contracts.
The Fed’s actions have generated a strong increase in Puts, which now account for 67% of total Eurodollar options open interest.
At quarter-end, Green Eurodollar Mid-Curve options open interest was 5.4 million (4 million puts and 1.4 million calls). Red Mid-Curve options O.I. was 4.9 million (3.6 million puts and 1.3 million calls). In total, O.I. in Green and Red Mid-Curve options represents 50% of total Eurodollar options O.I..
Quarterly Interest Rate Review – First Quarter 2014
5
PRODUCT OVERVIEW
DELIVERABLE SWAP FUTURES
5- YEAR AND 10-YEAR DSF LARGE OPEN INTEREST HOLDERS
Increased Demand Drives Strong Volume and Open Interest Growth Record 82,413 contracts ($8.2
billion notional) traded March 20 Over 1.76 million contracts
traded since Dec 2012 launch
Open interest briefly surpassed 114,000 contracts in December
Diverse User Base 50 participants in 10-Year DSF
37 participants in 5-Year DSF
Broad range of participants
includes asset managers, hedge funds, banks, prop firms, mortgage servicers and more
cmegroup.com/interestrates
6
PRODUCT OVERVIEW
CLEARED OTC IRS
Open interest continues to
trend upward, increasing from $3 trillion in June to $12.5 trillion in March with market share increasing from 28% to 53% during this same period.
Over 435 global market
participants have cleared at CME taking advantage of the most capital efficient solution.
PRODUCT SCOPE
Learn more at cmegroup.com/otc
Quarterly Interest Rate Review – First Quarter 2014
7
VALUE-ADDED TOOLS
DSF Analytics Page │ cmegroup.com/dsfanalytics
Invoice Spread Calculator │ cmegroup.com/spreadcalculator
Fed Watch Tool │ cmegroup.com/fedwatch
Quickly view the prices, rates and risk of DSF contracts
Easily perform comparisons with DSFs and corresponding OTC spot and forward swaps
Provides an excellent
approximation of the implied rate
Provides levels of invoice swap spreads (forward-starting swaps vs. CBOT Treasury futures)
Displays hedge ratios versus swaps, cheapest-to-deliver (CTD) and DV01 information for Treasury futures
Comments by Federal Reserve Chair Janet Yellen spurred speculation that Fed rate hikes could begin sometime in 2015.
The market currently prices the first rate hike in the Q2/Q3 2015 timeframe.
Fed Funds futures and options are
a highly effective means of hedging or speculating potential Federal Reserve overnight interest rate changes.
CME Group Fed Watch tool allows market participants to see the probabilities of Fed action. The tool monitors current probability but also tracks previous day probability and previous month probability.
cmegroup.com/interestrates
8
NOW TRADING
CONTRACT SPECSReference Tenors 2-Year, 5-Year or 10-Year
Delivery Months March Quarterly Cycle (Mar, Jun, Sep, Dec)
Contract Fixed Rate Set by the Exchange when a futures contract is listed for trading, as a rate per annum with 30/360 day count fraction, at an integer multiple of 25 basis points per annum.
Price Basis 100 points plus NPV of deliverable grade IRS
Contract Size €1,000 per point (€100,000 per contract)
Minimum Price Increment
Reference Tenor Minimum Price
Increment per Contract Block Threshold*
Notional Coupon Rates
Jun 2014 Sep 2014
2-Year Euro DSF 0.005 points (€5) 1,500 0.75% 0.75%
5-Year Euro DSF 0.01 points (€10) 750 1.75% 1.50%
10-Year Euro DSF 0.01 points (€10) 500 2.50% 2.25%
Last Trading Day Second TARGET settlement day before 3rd Wednesday of futures Delivery Month.
Delivery Day Third Wednesday of Delivery Month
Trading Hours CME Globex 23:00 p.m. GMT – 22:00 p.m. GMT SUN – FRI Trading in expiring futures terminates at 17:15 p.m. CET on Last Trading Day
Tickers
Bloomberg Ticker CME Ticker (Globex/Floor)
2-Year Euro DSF PTEA T1E
5-Year Euro DSF PFEA F1E
10-Year Euro DSF PNEA N1E
Matching Algorithms Outrights Calendar Spreads
FIFO (F) Pro Rata (K)
*Block trade reporting time is 15 minutes.
Learn more at cmegroup.com/dsf
Liquid means of managing interest rate exposure
Euro-denominated quarterly IRS contracts expiring on IMM dates for key benchmark maturities
At expiration all open positions deliver into CME Group Cleared Euro Interest Rate Swaps
Builds off success of USD Deliverable Swap Futures Citi, Société Générale & Nomura among firms that
plan to serve as market makers
Capital efficiencies through a Standardised Product
Economic exposure to interest rate swaps with simplicity, transparency & margin efficiency of a future
Flexible execution: Globex, Pit, Block Trades & EFRPs OTC trading advantages including:
- Ability to block calendar spreads; - Lower block thresholds & longer reporting times - No block surcharges
Quarterly Interest Rate Review – First Quarter 2014
9
WHAT’S COMING
COMPRESSION VIA COUPON BLENDING Automated. Scalable. Available to ALL Market Participants.
Compression via Coupon Blending is a new and innovative solution to actively reduce IRS notional amounts and line items Key Dates
Available for testing April 30 Live in production May 19
This patent-pending innovation provides clients with: • The first automated and scalable compression solution available to all market participants with cleared IRS trades • The ability to net pay-fixed and receive-fixed swaps with the same attributed but different fixed rates and notional amounts • Flexibility to utilize daily on an automated basis as part of the existing EOD workflows, or selectively as an ad-hoc process • Additional cost efficiencies with fewer transaction ticket charges when terminating or rolling outstanding residual positions, and lower third party costs for portfolio maintenance items
Learn How You Can Benefit from the Liquidity and Efficiencies of Our Interest Rate Solutions. Contact Us Today.
IN NEW YORKSean Tully, Managing Director
+1 212 299 2340
Agha Mirza
+1 212 299 2833
Andrew Newman
+1 212 299 2704
IN LONDONDavid Coombs
+44 20 3379 3703
IN SINGAPOREMalcolm Baker
+6520 6593 5573
IN CHICAGOSteve Dayon
+1 312 466 4447
Matt Gierke
+1 312 930 8543
Dave Reif
+1 312 648 3839
Ted Carey
+1 312 930 8554
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade.
Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are eligible contract participants (ECPs) within the meaning of section 1(a)18 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience.
CME Group is the trademark of CME Group, Inc. The Globe logo, Globex® and CME® are trademarks of Chicago Mercantile Exchange, Inc. CBOT® is the trademark of the Board of Trade of the City of Chicago Inc. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. All other trademarks are the property of their respective owners.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX, CME Europe and CME Group rules. Current rules should be consulted in all cases concerning contract specifications Chicago Mercantile Exchange Inc. is a Recognised Overseas Clearing House (ROCH) recognised by the Bank of England. Chicago Mercantile Exchange Inc., Board of Trade of the City of Chicago, and New York Mercantile Exchange, are Recognised Overseas Investment Exchanges (ROIEs) recognised by the Financial Conduct Authority. CME Clearing Europe Limited is a Recognised Clearing House (RCH) recognised by the Bank of England. Issued by CME Marketing Europe Limited which is authorised and regulated by the Financial Conduct Authority.
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IR277.3/0/0314
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