Chicago Mercantile Exchange Inc. (CME), the largest US futures exchange, and Tullett Liberty, the wholesale financial broker, have introduced a new electronic trade-matching capability. They claim it offers the first seamless, integrated trading and clearing of exchange-listed products with forward rate agreements (FRAs) in over-the-counter (OTC) interest rate markets. The system is scheduled to launch on 30 June.
The plan is to give derivative dealers the ability to manage their positions and counterparty exposure more efficiently via execution of daily FRA contracts listed by CME. The new functionality will enable contract matching on a weekly basis, employing a match algorithm designed to facilitate true multilateral spread trading of these FRA contracts.
The FRA contracts, which are essentially Eurodollar futures with flexible daily expiration dates, will be automatically matched and executed on GLOBEX, CME’s electronic trading platform, and cleared by the CME Clearing House, the largest futures clearing house in the world.
“By partnering with Tullett Liberty to introduce this trade matching and clearing functionality, we will provide the interest rate OTC market with a powerful new tool to better manage the unwanted counterparty risk that is inherent in their business,” says CME Chairman Terry Duffy. “CME is pleased to be part of this groundbreaking venture that will combine the best of exchange-traded and OTC markets and benefit market users worldwide.”
The partners say the matching technology mitigates forward interest rate gap exposure for dealers while providing the additional benefits of cross margining, straight through processing and order aggregation in a centralized marketplace that is supported by CME’s Clearing House. They say the resulting system will create substantial matching and capital efficiencies for participants in the derivatives markets.
“We are very pleased to be joining the CME in this new venture which continues to demonstrate our commitment to innovative product development for the marketplace,” says Tullett Group CEO Bruce Collins. “Enhanced capital usage and the provision of another avenue of risk management are in our view key elements to the success of this product. The application of technology should allow for rapid rollout of further currencies and asset classes with the additional expected benefits of real time risk elimination, trade confirmation and error reduction.”
“We are leveraging our position as the world’s largest futures clearing organization to undertake the first in a series of over-the-counter clearing initiatives designed to grow our business,” adds CME CEO Craig Donohue. “We also are providing our customers with greater capital performance bond efficiencies.”
“The need for derivative traders to eliminate mis-matched interest rate exposure is the logical driver of this development. This product offering maximizes the efficiency of the exchange approach with the demand by the derivative trading community to eliminate basis risk,” says Tullett Liberty Senior Managing Director of Capital Markets Vinayek Singh.