Home » Trade Ideas: Benchmark Swap Futures

Trade Ideas: Benchmark Swap Futures

>> Maximum Efficiency Trading with Benchmark Swap Futures

Using Eris Exchange IMM dated benchmark contracts with standardized dates and rates reduces costs and friction of traditional OTC par swap use

The Trade

Swap User takes directional position on 10 year swap rates, either for hedging or speculative purposes, then neutralizes position in one week after rates have moved in his favor

Alternatives

 

  OTC

  • Swap User pays fixed on a $100 million 10- year spot starting swap at 3.000% with Bank A
  • One week later, after swap rates increase, Swap User offsets the position by receiving fixed on 10 year swap from Bank B at 3.200%
  • Three months later, Swap User cleans up line items through market unwinds or third-party compression service

  

  • Swap User buys (pays fixed) a benchmark Eris 10 year future with fixed rate 2.250% at NPV of $71,000 (equivalent to par rate of 3.000%)
  • One week later, Swap User offsets by selling (receiving fixed) to liquidate the same contract at NPV $90,000 (3.200% par rate equivalent)
  • Trade can be electronic, or executed by phone above the block trade threshold

 

Implications

 

  OTC

  • Near-risk neutral position may require paying independent amount to two counterparties,  with financing provided via a Prime Broker
  • If the trades are cleared, Swap User faces CCP and Clearing Firm initial margin and potential “line item” and “maintenance” fees to carry positions
  • Swap Users must pay additional costs to unwind through additional trades, or through a compression service

  

  • Swap User retains no open position after risk neutralizing trade, receives Initial Margin back from his Clearing Firm, and is not subject to line item or maintenance fees
  • Streaming quotes in benchmark contracts on Eris SwapBook trading platform from dedicated liquidity providers and dealer banks ensures efficient closing out of positions
  • Eris Exchange offers fully anonymous trading through electronic and voice trading venues

 

Eris Exchange Savings

 

 
Initial Margin
Carry Cost
Unwind Cost (Bid/Ask)1
Total2
Cleared IRS
$3,300,000 for 1 week
$45,000  for 11 weeks
$2,184
$116,000
($58,000 per trade)
$118,184
Eris Exchange
$3,300,000 for 1 week
$1,899
$58,000
$59,899

 

1Assumes separate market unwinds for OTC position. Costs could be reduced through compression or package unwind. 2Calculations assume $100mm notional, carrying costs assume 3% funding cost, and bid/ask cost assumes a spread of 0.6 bps. Analysis assumes transaction fees are identical, and excludes line item fees.