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 work to bring new rules that will increase the relative expense of OTC swaps, thus making futures even more attractive by comparison. The new swaps rules were originally supposed to be announced on November 15, however, CFTC commissioner Scott O’Malia cast doubt this week on the likelihood of new swaps rules by the end of November.
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 yesterday of customers transitioning to futures, “Right now they tend to be smaller players.”
Further, the customizability of swaps against futures contracts might make them more palatable to investors in the face of potential fluctuations in interest rates or energy prices.
Future of Derivatives in Chicago?
In tune with the “futurization” of the swaps market, some market players and large personalities are touting Chicago’s widespread employment of futures contracts as a model going forward.
According to some participants at a recent industry conference in Chicago, disaffection with large banks is propelling a “transformation” of the derivatives industry toward a Chicago style model.
“There is no trust … in the current sell-side orientated approach,” Clifford Lewis, an executive vice president at State Street Global Markets, said at the conference. He added, “I think the solution is going to be found in Chicago and the Chicago community. Not by Wall Street or (London’s) Lombard Street.”
Chicago Mayor Rahm Emanuel also added support to CFTC chairman Gary Gensler and the “futurization” model now being associated with Chicago.
“The one place that did very well [during the financial crisis] was the futures market,” Emanuel told conference participants.