News: Standardised OTC swaps (TrueEx) to launch within weeks - Risk.net

19 April 2013 | Bill Hodgson

Sunil Hirani who created CreditEx, now part of ICE, has built a new trading market TrueEx, and registered as a Designated Contract Market (DCM) with the CFTC. TruEx will offer trading in rate swaps but using standardised terms:

  • Standard tenors: 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 15, 20, 25, 30 years
  • IMM start dates in March, June, September and December
  • 3M LIBOR rate, quoted the day before each IMM date
  • $5m notional minimum and multiples of, for the on-the-run contract
  • $1m minimum notional for off-the-run

The benefit of these IRS products is netting - keeping the price fixed during each 3 month period means the buy-side can trade in and out, and net at the CCP. Fully flexible IRS move in price every day and make trading out of a position more complex. The approach  differs from the CME deliverable swap futures, in that these aren't 'futures' they're real rate swaps which feed down to CME and LCH for clearing.

And a new acronym to enjoy: Standard Coupon Standard Maturity (SCSM).


Very Interesting.I haven't read the 107 page product spec, but it says the following in relation to margin requirements:"A Participant must comply with all margin requirements established by each relevant Clearing House and by each relevant Clearing Firm, if applicable, as well as any margin requirements set forth by the CFTC or other applicable law."In other words- let the clearing houses decide what margin to charge!Given the SCSM nature of these contracts, I wonder whether the clearing houses will decide to charge a 1-or-2-day IM treatment, similar to swap-futures, because they're now standardized. Right now the clearing houses charge IM with a 5-to-7 day holding period for IRS because of their flexible nature.

Despite the standardised nature, these are true OTC products I believe, and I assume will be cleared as such - after all SwapClear futures.

Reblogged this on Carl A R Weir's Blog.

This is deliberately confusing :-)DCMs are what we loosely call exchanges today and (I think the key point is that they are order driven markets i.e. no quote-driven protocol). Confusingly DFA provides for DCMs as well as SEFs to be used to trade swaps. Therefore I agree with Bill that these are swaps not swapfutures in any sense and will be subject to swap clearing regulations (including margin rules) but DCM-specific trading regulations (which are oddly a bit looser in some respects than proposed SEF execution rules).For precision (at risk of pedantry / being corrected by Bill) the participant can trade a consistent fixed leg rate of say the March IMM 2-year swap the same but the swap price / swap yield / swap spread to LIBOR will vary over time with market level. (This means that there'll be more significant day 1 VM on these trades than for spot starting swaps which are the most liquid products in today's swap market which have close to zero VM on day 1). Some large buy side firms already do this today in the voice market. I'm not sure of any commercial driver other than operational simplicity (at a cost of some lack of hedging flexibility). For comparison the SwapClear settlement prices are for spot starting 2year, 5year, 10year swaps etc. instead of the IMM date swaps for every quarter out to 10 years and then beyond that. Let's not forget also that Bloomberg and TradeWeb (and iSwaps and DealerWeb) already trade swaps electronically though the standard contracts are the spot starting 2s, 5s and 10s on trading day. (There are other platforms but these are the main ones for IRS). These standard contracts have the advantage that MTM and therefore VM starts at zero, whereas the IMM swaps will not.Worth also pointing out that there is nothing stopping any of the ECNs above or other SEFs from trading IMM swaps these products on both RFQ or CLOB basis.

Hello John,The way I read it is FTSE MTIRS are not constant maturity; they daily rebalance IRS from spot IRS pricing so intraday the values replicate the underlying IRS market with minimal basis risk.Your dilemma seems to be what the index series address. Say a trader wants to gain exposure to 5 years for 1 month In reality most traders trade a spot 5 year then in one months time trade out via a spot 5 year in the opposite direction (not the illiquid 4yr 11mth) this is what the FTSE MTIRS index replicates.A great question was asked at a conference with no real answer - nothing happens until two traders decide to transact an IRS then a agreement takes place so how can you have a future on something that hasnt happened?The IRS excahnge or OTC debate goes on...........Cliff

Cliff, see below from the index rules which led me to believe the constant maturity point:"3.1 Rebalancing the Indices 3.1.1 All FTSE MTIRS Index Series US Dollar Indices are rebalanced daily. To avoid cash flows paid out from the synthetic swap positions, all IRS trades are sold and newly bought, synthetically, once every day. This rebalancing avoids the shortening of lifetimes of all positions which, at the beginning, are full years, so that they can not become less than the respective years.

On TrueEx its worth pointing out that without IMM swaps trading on a DCM or an exchange there is no way to net down to zero swaps cleared at CME since unwinds are not possible in CME (they are at SwapClear). Nothing to stop SEFs also trading IMM swaps but I don't believe any ECNs have them yet.

The TrueEx contracts will give exposure to long term IRS, and provided you trade out of the contract before the first coupon date, no cash flows. The point of the TrueEx approach is that you can easily put on an offsetting trade and see your position net to zero (at the CCP), which is harder with spot starting IRS. The construction of the MTIRS indices is quite different from a plain vanilla IRS I'm not a trader so can't suggest which is more appropriate to use for hedging or investment. I'll forward your comment to Jon Skinner, one of the other site contributors who I think would have input for you. With the MTIRS index, it's a value play no actual IR Swaps exist whereas with TrueEx you'd need to join a CCP and for a while have a real IRS in your account, with VM & IM margin flows, and all the effort of becoming a client of the CCP via a Clearing Broker or FCM. Bill.

Thanks Bill There are a few of these efforts around, and information is a problem.At least with FTSE the ingredients are on the tin + the quality name for pre and post trade - so you know what your buying and its a fair price.Cliff

Cliff, I think Bill's covered this pretty well on your specific questions. However, I take your point about information and the subtler aspects like basis risk which needs pulling together across the piece. I may do a post to try to do this soon.

Looking at some of the information on the web, I note that the MTIRS indexes are constant maturity e.g. if you buy a position today it's spot starting 5 year swaps and hold it for a month in a month's time you'll still have spot starting 5 year swaps for that spot date (so the start and end date move forward a day every day). Whereas if you do a spot starting swap trade (by voice or on an ECN or on TrueEx or on a SEF in future) you'll be a month into the swap and the start and end date are fixed. So the risk of the index is more like the risk of a constant maturity swap rather than a plain vanilla fixed / float IRS.

Not clear that there is a solid way to trade the FTSE MTIRS index. Of two examples in the online press: - Plus-DX tried to offer their SIC contract based on the index and cleared at LCH (futures CCP I think). However, Plus markets their parent was sold for GBP 1 to ICAP in 2012. - Kepler Capital Markets (a broker) seem to offer a "central market" for the index. However, there's nothing out there since the PR release in 2010.

Interesting when trading long term IRS for short periods, you are capturing the IRS exposure or the DV01 and dont need the cash flows - does anyone know if the Trueex offering a better fit? or is the FTSE MTIRS offering be a better fit for these strategies?My concern is basis risk between the underlying IRS and the contract.Cliff

No correction needed ;-) Your point on VM makes sense perhaps the reason ISDA and SIFMA are supporting this, is to create an agreed framework for this approach and avoid fragmentation of trading activity. If you traded a spot IRS which then moved against you to the same price as trading one of these standard swaps at the same level would you pay the same amount of VM?

Does anyone know if this contract operates in similar fashion to the FTSE MTIRS index series - also cleared via LCH?Could anyone post a link to the the contract specs? And if possible who are the liquidity providers?

The products at TrueEx are individual IR swaps, whereas the MTIRS is an index of IR exposure. The trades are sent for clearing and behave like any other single IRS trade.I don't know right now which of the major banks will support the platform but the suggestion is that big buy-side firms are driving this so the banks won't be far behind.Bill

Simply put yes the VM would be the same provided:- the fixed rate is the same (I can't find on a quick glance through how they standardize the fixed rates in the TrueEx contract specs.) - the spread on the LIBOR leg is the same (which affects the cash flow amounts on the floating leg). In fact this won't be the same in practice as this is where the swap price lives.The other significance of the VM point is that because these products can be off market and have significant upfront VM on trade date so they will struggle to be liquid D2D without the clearing mandate or a world where SCSA has been implemented to eliminate VM currency valuation differences. (Novations have slowed dramatically for the same reason - hence the SCSA initiative)

the advent of Truex as Bill Hodgson skillfully blogs about hereand the publication by ISDA and SIFMA of MAC (or market agreed coupon) IRS forms,

the advent of Truex as Bill Hodgson skillfully blogs about hereand the publication by ISDA and SIFMA of MAC (or market agreed coupon) IRS forms, are we