With new capital requirements of banks and other institutions, John Lothian News sat down with CME Group’s CEO Phupinder Gill at the FIA Boca Conference to talk about CME’s new cleared swaptions service through its clearinghouse, and a repo futures contract.
“If you look at the world and look at the situation around the globe, you’ve got South America, which has some bright spots but a growth rate that is at best uncertain,” Gill said. “You have low growth rates in the US. If you look out to Europe, where you have a lot of potential merger and acquisition activity, the growth prospects for the Eurozone, at least in the next three to five years, the wide expectation is that it is going to be flat to even down. And if you look at Asia, you are looking at high single-digit growth rates. And you look back at where CME has invested a lot of its capital in the last year. It’s been in people and areas of growth around the world. You see us, in spite of this tough environment, expanding the client base by being relevant to our clients.”
What that means is CME continues to pound home the message that it is here to grow the pie. CME is now well-focused on developing products that do two things – provide tradeable contracts and also reduce the overall costs constraints on market participants. In interest rates, the exchange is expanding beyond traditional futures and options products into the so-called repo market, or Treasury repurchase transactions space, which has struggled in recent months.
A recent report in the Wall Street Journal showed that almost 13 percent of Treasury repos for the week of March 9 included a failure to deliver by one of the parties, up from 2.7 percent in 2015.
“We look at that (repo contract) as a key component of providing those capital efficiencies,” Gill said. “So we’re working with several of our partners to create a repo solution that adds to the already capital efficient solution we have.”
CME has been working with BNY Mellon bank in the development of a daily US Tri-party Repo index contract. And in April, CME will launch clearing of swaptions, as the only clearinghouse to offer clearing on the product. The initial cleared products will be US dollar-denominated interest rate swaptions with European-style exercise, a maximum 2-year option expiry and a maximum swap tenor of 30 years.
“We don’t think it should be mandatory to clear it,” Gill said. “But for those folks seeking capital efficiencies, swaptions make the most sense. It is what I’ll call the missing piece.”
Among the efficiencies touted by CME include the simple reduction of risk on cleared interest rate portfolios, but also margin offsets of up to 91 percent, portfolio margining on Eurodollar, Treasury and deliverable swap futures. The service is also aimed at improving capital ratios.
For Gill, these are the things that will help drive business in the coming months.
“2016 is off to a good start,” Gill said. “But in order to appreciate how the rest of the year is going to work itself out, you have to think in terms of what would drive value for us.”