Futures Markets and the Futurization of Swaps

Among the many (many) details contained within the mammoth Dodd-Frank financial reform bill is a set of rules that will change what derivative swaps can take place off-exchange. In other words, there will be stricter limits on off-exchange swaps, resulting in more of these trades taking place within established exchanges – the whole process is sometimes called the “futurization” of swaps.

The goal of this reform is to bring more regulatory oversight to the $300 trillion swaps market – trading on exchanges is supposed to provide more transparency and force a bigger slice of the derivative trading market to abide by existing exchange rules. But this transition is introducing another wrinkle to the markets, as well: which exchanges are going to score all this new business? The Wall Street Journal explains what’s at stake:

Some traders believe a harmonization between the block proposals in swaps and futures, and the margin treatment of both, hold the keys to determining which venues will see the most derivatives activity in the wake of the 2010 Dodd Frank law.

That law mandated that a large chunk of the $300 trillion U.S. swaps market be traded openly for the first time, either on exchanges or alternatives called “swap execution facilities.”

If the block thresholds and margin requirements are similar for futures and swaps, then market participants are more likely to pick platforms based on their individual merits and their needs. If futures markets have more favorable blocks and lower margins, exchanges are more likely to win a greater share of activity because the rules would incentivize trading in futures over swaps, traders say.

Futures trading volumes have dropped off over the few last years, so the competition is likely to be fierce. And if these regulatory changes end up making futures markets more attractive, the CME Group could be looking at quite a boost. This wouldn’t necessary change the dynamic too much for managed futures – more traders won’t necessarily change the trends – but increased volume could change the way larger firms approach position sizing.

We’ve talked in the past about how most of the biggest CTAs are “stuck” trading only the most liquid of futures markets – contracts like S&P 500 futures – because they’re too big to make trades in smaller markets (like coffee or orange juice) without moving those markets with their trades. More market participants and higher volume might make it feasible for larger CTAs to move into some of the currently more thinly traded markets.

This is all still very hypothetical at this point. But nevertheless, higher futures volumes is something that we (and undoubtedly the CME) are quietly rooting for.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.