Interest-Rate Swap Futures Surpass $130 Million at CME Group

CME Group Inc. has recorded trades of more than $130 million in notional value on interest-rate swap futures it started offering yesterday.

With contracts trading in increments of $100,000, the notional amount equates to 1,362 transactions as of about 12:30 p.m. in Chicago, said Michael Shore, a spokesman for CME Group, the world’s largest futures exchange. Of those, 782 were recorded yesterday and 580 today on the exchange.

The contracts are based on 2-, 5-, 10- and 30-year rate swaps that change from a future to a swap if an investor takes delivery of the contract.

The difference to buy and sell the 10-year contract is about half a basis point, a sign of good demand, said Rocco Chierici, vice president of the fixed-income group at R.J. O’Brien & Associates who works on the floor of the Chicago exchange.

“It shows the buyers and sellers are coming together,” he said in a telephone interview.

The rate-swap futures trading compares with much larger transactions in the privately negotiated interest-rate swaps market, where average trade size was $270 million, according to a March study by the Federal Reserve Bank of New York.

Infrequent Swaps

The district bank analyzed three months of market information from June to August 2010. It found about 300 users of the instruments, which is dominated by the world’s 14 largest banks. Transactions in interest-rate swaps were infrequent, with no contract trading more than 150 times a day on average, the Fed said.

The margin CME Group requires to buy or sell the rate-swap future is lower than to enter into an equivalent swap because the time to unwind a defaulted position is shorter with the future than the swap, Sean Tully, managing director of interest-rate products at CME Group, said in an e-mail. That leads to the futures margin being about half as much as a cleared rate-swap margin, he said.

If customers take delivery of the rate swap future and it converts to an interest-rate swap, the margin coverage increases to five days from two days.

“We’re very pleased with the customer feedback and volumes we’ve seen so far,” Tully said.

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