Potential trading volume for interest rate swap futures is "significant" as Basel III and Dodd-Frank Act regulatory frameworks pushes more risk management activity onto established exchanges and clearing platforms, according to industry consultant Woodbine Associates Inc.
The evolution toward the so-called futurization of the swap market "is the result of cost differences of trading products with similar risk profiles," Woodbine analysts wrote in a new report. "Regulation has created economic incentives to transfer generic risk through generic products."
Using a customized product, such as a swap, to take a directional view on rates or swap spreads will no longer be the most cost-efficient way to express that view. "While many see this as the futurization of the swaps markets, it is actually the reversal of the swap-ification of generic risk transfer," Woodbine said.
New, exchange-based contracts, such as CME Group’s Deliverable Interest Rate Swap Futures, may not entirely replace the swap market. Still, those contracts "offer attractive, capital-efficient alternatives for generic risk transfer at a time when participants, particularly banks, face significantly higher capital and funding costs."
Source: http://www.cmegroup.com/education/featured-reports/significant-potential-for-interest-rate-swap-futures.html
The evolution toward the so-called futurization of the swap market "is the result of cost differences of trading products with similar risk profiles," Woodbine analysts wrote in a new report. "Regulation has created economic incentives to transfer generic risk through generic products."
Using a customized product, such as a swap, to take a directional view on rates or swap spreads will no longer be the most cost-efficient way to express that view. "While many see this as the futurization of the swaps markets, it is actually the reversal of the swap-ification of generic risk transfer," Woodbine said.
New, exchange-based contracts, such as CME Group’s Deliverable Interest Rate Swap Futures, may not entirely replace the swap market. Still, those contracts "offer attractive, capital-efficient alternatives for generic risk transfer at a time when participants, particularly banks, face significantly higher capital and funding costs."
Source: http://www.cmegroup.com/education/featured-reports/significant-potential-for-interest-rate-swap-futures.html
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