CHICAGO (Reuters) - CME Group Inc (CME.O) on Tuesday said it is planning to offer a new suite of futures tied to interest rate swaps later this year, as the giant exchange operator seeks to take advantage of a regulatory push for more of the $400 trillion over-the-counter swaps market to move into clearinghouses and onto regulated trading platforms.
CME currently lists rate swap futures that, like most financial futures, settle to cash, but have largely been a flop and are rarely traded.
The newly planned rate swap contracts will, like futures on grains or livestock, convert into the underlying commodity at expiration—in this case, an interest rate swap. Buyers of the futures will become the receivers of a fixed rate of interest and the payers of a floating rate in a CME-cleared rate swap.
Interest rate swaps are often used by companies to exchange types of interest rate payments with each other, typically involving a fixed interest rate and a floating interest rate.
The new contracts will be offered starting November 13, pending approval from the Commodity Futures Trading Commission, CME said in a statement.
Under Wall Street reform legislation, many swaps will be forced into clearinghouses starting late this year. CME is one of the biggest U.S. clearers of interest rate swaps.
The plan could allow CME to capitalize on rule changes that many expect will eventually push more traders out of over-the-counter, or OTC, contracts and into futures.
By offering clearing for OTC interest rate swaps and trading of rate swap futures, CME will be poised to capture business in swaps no matter which contracts traders decide to use.
Swaps futures may prove to be cheaper to trade than swaps themselves, because traders can offset the margins they put up to back their swap futures contracts against margins they may have up at the CME clearinghouse to back other futures contracts, reducing their overall margin requirements.
“New swap futures will provide tremendous opportunities for margin efficiencies in a capital-constrained world,” CME said in the statement.
In a sign that some of CME’s biggest customers believe the product has legs, Citi, Credit Suisse, Goldman Sachs, and Morgan Stanley have agreed to serve as market makers to boost liquidity during the contracts initial stages.
Editing by Bob Burgdorfer