The new contracts are designed to provide an efficient means of trading and managing the risk of swap rates with the benefits of CME's price transparency and financial safeguards. CME is offering spreading opportunities with its highly liquid Eurodollar futures market, the world's most actively traded futures contract, which is increasingly referenced as the global benchmark for measuring the relative value of U.S. dollar-denominated short-term fixed-income securities.
"In the more than two decades that interest rate swaps have existed, they have grown from an innovative means of transferring financial risk to a multi-trillion dollar global business," said CME Chairman Scott Gordon. "The interest-rate swap curve is pegged to CME's Eurodollar futures prices, and Eurodollars have provided a risk management tool for swap dealers to hedge their risks, growing in tandem with the interest rate swaps market."
"With the introduction of swap futures contracts, CME will offer another set of products that will allow the fine-tuning of interest rate hedges and meet the accounting and regulatory requirements of our target customers," said CME President and CEO Jim McNulty.
Contract months will be listed in the March quarterly cycle, and the contracts will settle in cash based on the International Swaps and Derivatives Association (ISDA) U.S. dollar benchmark swap rate with 10-, five- and two-year maturities.
CME swap rate futures contracts will be priced using CME's International Monetary Market (IMM) Index convention, or 100 minus the applicable rate. For example, a rate of 7.20 percent will be quoted at 92.80. This pricing convention is familiar to customers using CME's benchmark Eurodollar futures contracts, the world's most actively traded futures contact in 2001.
CME swap futures contracts will have a minimum trading increment (tick size) of one quarter of a basis point (0.0025) equaling $25.00. CME 10-year swap rate futures will have a nominal face value of $100,000, while five-year and two-year swap rate futures will have nominal values of $200,000 and $500,000, respectively.
Swap futures will be supported by lead market makers designated by the exchange to provide liquidity.
Customers may achieve potential cost savings in performance bonds due to the ability to recognize offsetting positions in other CME interest rate products, including Eurodollars, at the CME Clearing House. In addition, CME will offer customers the ability to use "Exchange Basis Facility" transactions, or the combination of a swap rate futures position with an equivalent opposite position in the cash market.
Introduced in 1981, CME's Eurodollar futures are based on bank deposits denominated in U.S. dollars held outside of the United States and have been a pricing benchmark in corporate funding for decades. The Eurodollar futures contract represents an interest rate on a three-month deposit of $1 million.
Chicago Mercantile Exchange Inc. (www.cme.com) is an international marketplace that brings together buyers and sellers on its trading floors and GLOBEX® around-the-clock electronic trading platform. CME offers futures contracts and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moves about $1.5 billion per day in settlement payments and manages $28.2 billion in collateral deposits. CME is a wholly owned subsidiary of Chicago Mercantile Exchange Holdings Inc.
