A bell ringing ceremony recognizing these milestones will occur on August 22 at 7:20 a.m. at the CBOT, with CBOT officials joined by Chicago Mayor Richard M. Daley, Chicago Federal Reserve President Michael Moscow and other Chicago financial exchange leaders and invited guests.
CBOT Chairman Nickolas J. Neubauer said, "Our business strategy of providing deep and liquid markets for the CBOT's interest rate complex in either the open auction or electronic marketplace ultimately pay huge dividends to the U.S. Treasury and the American consumer in the form of lower borrowing costs. These futures and options contracts thrive as premier global risk management vehicles because of the liquidity, flexibility and integrity found at the CBOT.
"In times of crisis, a well-functioning Treasury bond market is critical to the stability of U.S. financial markets, both as a means for investors to shift long-term interest rate exposure and as a reliable means for market participants to assess the value of long-dated assets and liabilities that are less liquid and creditworthy."
In these post-Enron days, the steady and reliable performance of the CBOT's interest rate complex contrasts sharply with the current volatility found in global equities markets. All trades in the CBOT's financial, equity and commodity markets are accounted for and settled daily via the AAA-rated Board of Trade Clearing Corporation.
Neubauer noted, "Integrity at the CBOT also means we stand for timely information, open communication and price transparency, plus that triple-A guarantee, which is a uniquely important asset in today's environment. The CBOT is committed to open, fair and transparent markets, with immediate reporting of all trades that are competitively executed."
CBOT President and CEO David J. Vitale added, "As evidenced by the volume growth at the CBOT so far this year, market users are looking for a safe haven to manage their price risk. In July the exchange recorded its highest volume month ever, and we are on track for a record volume year.
"Market users the world over continue to use the CBOT's Treasury futures and options products on both trading platforms. As a product-driven organization, we are committed to strengthening the liquidity for these products on either platform so that the benefits to consumers and market users are available for many years to come."
The CBOT's interest rate futures and options complex has grown in volume and in the scope of instruments available to market users. The complex, starting with Treasury bond futures 25 years ago in August 1977, and 10-year Treasury note futures 20 years ago in May 1982, today also includes 5-Year and 2-Year Treasury note futures, 30-Day Fed Funds futures, and 10-Year and 5-Year Swaps futures.
The exchange's interest rate complex thrives because pension fund managers, fixed income dealers, mortgage and insurance companies, corporate money managers, investment portfolio managers, and state and local governments rely on it to manage their financial risk. And this in turn leads to benefits to the consumer.
It has been said that the American consumer can transact a mortgage for less cost, relative to income, than any other consumer in the world, That is due partly to the CBOT's interest rate futures complex. A quick snapshot illustrates this point.
CBOT economists recently produced evidence that suggests how the introduction of financial futures has affected transaction costs in the capital markets. Today you can trade Treasury securities in a half-tick market or better. A common bid-ask spread is one sixty-fourth of a point -- $15.625 on a $100,000 transaction.
In the mid-1970s, before the CBOT introduced Treasury bond futures, the bid-ask spread in the underlying market was commonly one-eighth of a point. That amounted to $125.00 for the same $100,000 transaction.
As market participants use futures to manage interest rate risk, they can transact far more cheaply than they could before the launch of CBOT interest rate futures. CBOT markets do matter to the consumer's bottom line.
Consumers benefit because lenders and suppliers of capital--banks and mortgage companies, among others--hedge and reduce their risk through the CBOT's interest rate futures complex where the market liquidity and tight bid-ask spreads help make possible a lowered level of interest rates to borrowers.
As a result of the CBOT's extremely high level of market liquidity, transparency and integrity, financial markets are significantly more efficient--and interest rates are lower than they would have been in the absence of this active futures market. For example, in the pre-Treasury bond futures era, cash market bid-ask spreads were wide; markets were thin with wide price swings. These factors all greatly affected interest rates and the cost of borrowing money.
The nonpareil effects generated through the 25 years of the CBOT interest rate complex era have helped new homebuyers through lower mortgage interest costs and mortgage refinancing rates. Consumer loans similarly carry lower interest rates. Additional good news for consumers is the fact that use of CBOT interest rate futures lowers the federal government's borrowing costs, which in turn reduces the U.S. citizen's implicit tax burden. CBOT interest rate futures and options products assist the government's debt management by minimizing borrowing costs through regular and predictable debt issuance.
Large and small businesses also are able to borrow more cheaply, providing the country's business community an increased supply of capital, with resultant greater productivity and prosperity. Lowered interest costs allow businesses to raise capital at reduced risk and make it less expensive for them to finance growth. The benefits of the CBOT's interest rate complex are even far more out-reaching, with capital from abroad attracted to U.S. markets by the depth, breadth and resilience of the U.S. capital market structure fostered by the CBOT's products.
Over the past quarter-century, the CBOT's Treasury bond and 10-year Treasury note futures contracts have grown because of their transparency, liquidity and integrity. Nearly 1.4 billion Treasury bond futures have been traded with a notional value of over $139 trillion, compared with the current U.S. economy's gross national product at some $10 trillion annually, and with the 10-Year note futures volume to date at some 385 million contracts with a face value of $38.5 trillion.
CBOT options on Treasury bond futures, launched in 1982, were the first such product in the derivatives industry, and have traded over 417 million contracts at a face value of more than $41.7 trillion. Options on CBOT 10-Year Treasury notes, since their launch in 1985, have traded some 110 million contracts with a notional value of approximately $11 trillion.
Following is a brief rundown of the volume and open interest records attained by the CBOT interest rate futures complex:
- T-bond futures daily volume record: 1,121,634 contracts on 8-27-98
- T-bond futures open interest record: 1,138,994 contracts on 7-6-98
- T-bond options daily volume record: 540,873 contracts on 9-10-98
- T-bond options open interest record: 1,604,136 contracts on 10-9-98
- 10-year note futures volume record: 730,487 contracts on 7-24-02
- 10-year note options volume record: 333,754 contracts on 8-14-02
- 10-year note futures open interest record: 1,020,418 contracts on 8-14-02
- 10-year note options open interest record: 1,933,981 contracts on 8-15-02
