CBOT Markets: Responding To A Changing Treasury Market

The dynamics of the financial market are changing. Thirty-year treasury futures volume is down 21%, while cash market trading in the 30-year bond has declined 69.3% this year. In contrast, the CBOT's 5-year and 10-year note futures contracts are up 63.8% and 44.1% respectively. While the 30-Year Bond may be retracting as a benchmark contract, the CBOT's 10-year note contract, the new benchmark for U.S. Treasury debt, and its new agency note contracts continue to grow at unprecedented rates.

In addressing these market changes, the CBOT has taken proactive steps to provide the marketplace with its fundamental risk management tools.

In March 1999, the CBOT changed the minimum tick size in the 10-year Treasury note contract from 1/32 to ½ of 1/32 - a minimum value fluctuation from $31.25 to $15.625 per contract.

This change reflected the cash market environment and provided increased flexibility and liquidity to market users.

The change was recommended after numerous member and customer meetings, and followed a long-term evaluation of current and future treasury market needs.

The CBOT proactively responded when the agency debt market issuance began exceeding that of the Treasury market in recent years.

In mid-March, 2000, the CBOT successfully launched benchmark agency contracts based on Fannie Mae Benchmark notes and Freddie Mac Reference notes instruments.

Volume in the CBOT contracts quickly surpassed that of the CME and the Cantor exchange, reaching average daily volume of 5,216, year-to-date. Forty percent of the agency contract volume comes from commercial business, indicating that investors and institutional users are turning to the CBOT's alternative fixed-income instruments for their risk management needs.

As volume builds in the CBOT's 10-year note complex, the CBOT is considering transplanting the 10 and 30-year pits to best accommodate its financial market users.

A report will be published by mid-June which will assess the trading floor configuration, including trader positioning, firms' access to their brokers, and relocation of desks and options pits.

For more information on the CBOT's efforts to respond to the market needs of its customers, contact Maria Gemskie at +1 312-341-3257.