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Felix Shipkevich January 21, 2013

The U.S. Commodity Futures Trading Commission (CFTC) will publicly discuss the “futurization” of the swaps market on January 31. The “futurization of swaps” is quickly shaping up to be a hot-button issue in early 2013. The CFTC’s discussion will purportedly revolve around the following:

  1. general industry views and concerns regarding the conversion of swaps to futures in each asset class;
  2. clearing and different margin requirements for swaps and futures;
  3. transaction-related matters including appropriate block rules for swaps and futures; and
  4. the effect of the conversion of swaps to futures on end-users.

CFTC and the Futurization of Derivatives, Swaps

The “futurization of swaps” is part of an ongoing conversation about the futurization of derivatives.

Spurred by new and pending CFTC regulation that favors transparent prices, clearing, and standardized electronic trading, large banks are opening up to futures contracts. The move to futures is likely by design, as regulators continue to bring rules that will increase the relative expense of OTC swaps, thus making futures even more attractive by comparison.

The push toward futures has been led by large entities like IntercontinentalExchange (ICE) and CME Group, the largest derivatives exchange in the U.S. Yet “futurization” is also the result of uncertainty surrounding new rules that could mandate how swaps are traded on non-exchange platforms called swap execution facilities (SEFs).

Nevertheless, the idea of a rush toward futures—as opposed to the regulatory push to “futurize” swaps—may be slightly overstated at the moment. As Kim Taylor, president of CME clearing said recently customers transitioning to futures, “Right now they tend to be smaller players.”

Further, the customizability of swaps against futures contracts might make the more palatable to investors in the face of potential fluctuations in interest rates or energy prices.

CFTC Event this Friday

The CFTC’s event will be held in the Conference Center at the CFTC’s headquarters at Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC. The discussion will be open to the public with seating on a first-come, first-served basis.

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