{"id":24393,"date":"2012-10-18T12:00:00","date_gmt":"2012-10-18T17:00:00","guid":{"rendered":""},"modified":"2012-10-18T12:00:00","modified_gmt":"2012-10-18T17:00:00","slug":"swaps-theyre-in-our-future","status":"publish","type":"post","link":"https:\/\/tradingtechnologies.com\/blog\/2012\/10\/18\/swaps-theyre-in-our-future\/","title":{"rendered":"Swaps: They\u2019re in Our Future"},"content":{"rendered":"

More than two years after the Dodd\u2013Frank Act<\/a> was passed, it\u2019s surprising how much still remains unsettled with regard to what new regulations may be implemented and how the industry will be transformed. One of the few changes that seems certain is that over-the-counter (OTC) swaps will move to a centrally cleared model.<\/p>\n

What remains to be seen is which model for trading and clearing interest rate swaps will ultimately win out. Will these swaps remain custom OTC contracts traded via a swap execution facility (SEF)? Or will the industry move toward an exchange model where swap-like futures are traded on a designated contract market?
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<\/span>Siding with Futures<\/span><\/h3>\n

It seems more and more as if the futures model will ultimately win out. Exchange-traded interest rate swap futures have margin efficiencies that the OTC model can\u2019t match. A number of strategies that make use of OTC swaps today may no longer be profitable once these swap positions are subject to margin requirements, an issue which the substitution of swap futures for OTC contracts substantially alleviates. <\/p>\n

The trend toward either the \u201cswaps as futures\u201d or \u201cfutures on swaps” model is noted by research firms such as TABB Group<\/a>, but is also reinforced by moves the exchanges are making. For example, the Chicago Mercantile Exchange<\/a> (CME) recently announced plans to list deliverable interest rate swap futures, and IntercontinentalExchange<\/a> (ICE) is transitioning its OTC energy contracts to futures.<\/p>\n

<\/span>Making the Swap: Eris Exchange on TT<\/span><\/h3>\n

For these reasons, I was very excited last month when we announced our plans<\/a> to provide connectivity to Eris Exchange<\/a>. Eris has created products that capture the best of both worlds. Eris contracts are futures, which means they bring with them margin requirements substantially lower than comparable OTC contracts\u2014up to 95 percent lower for accounts with highly correlated positions. At the same time, Eris products are designed to replicate the cash flows of OTC swaps while also allowing for custom coupons, effective dates and maturity dates to be specified, giving firms the ability to tailor the contracts precisely to their needs. <\/p>\n

<\/p>\n

In addition to being an effective vehicle for corporations to hedge their business risks, a number of strategies based on Eris futures can be executed using TT\u2019s suite of server-side execution tools, such as the Autospreader\u00ae Strategy Engine<\/a> (Autospreader SE) or the new ADL<\/a>\u2122 visual programming platform with Algo Strategy Engine<\/a> (Algo SE). These include:<\/p>\n