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Q1 2017
CME Group Swaptions Clearing
First swaption trade cleared on April 11th- Launched based on strong market
demand
Voluntary clearing allows market participants the flexibility to reduce the risk of their cleared IRS portfolios
Margin offsets of up to 91% possible by adding swaptions to CME cleared IRS portfolios
Portfolio margining with our cleared IRS and Eurodollar, Treasury, and Deliverable Swap Futures
Reduces bilateral counterparty credit risk and frees up credit lines
Improves Capital Ratios, lowering capital charges that could ultimately be passed onto end users
"With uncleared margin rules coming into "RBS plc is pleased to take a leadership role as
greater focus for our clients, Credit Suisse is one of the first banks that will provide cleared
excited to facilitate voluntary swaptions clearing swaption liquidity to our global client base. We
at CME Group. Clearing swaptions enables our are very supportive of the early adopters that
clients to obtain the greatest operational and use the CME swaption clearing solution to
capital efficiencies from clearing, while reducing reduce bilateral counterparty exposure,
the risks in their portfolios." particularly with the added cost of margin for
non-cleared derivatives coming later this year."
John Dabbs, Global Head of Prime Alan Mittleman, Head of Rates Trading,
Derivatives Services at Credit Suisse Americas at RBS plc.
CME CORE & the Margin API will support initial margin calculations
Margin Tools for swaptions as well as portfolios containing IRS and swaptions
1Y5Y Long Payer ATM Swaption Delta Hedged using Swap 89%
1Y5Y Short Payer ATM Swaption Delta Hedged using Swap 81%
1Y5Y Long Receiver ATM Swaption Delta Hedged using Swap 87%
1Y5Y Short Receiver ATM Swaption Delta Hedged using Swap 81%
2Y30Y Long Payer ATM Swaption Delta Hedged using Swap 88%
2Y30Y Short Payer ATM Swaption Delta Hedged using Swap 82%
2Y30Y Long Receiver ATM Swaption Delta Hedged using Swap 91%
2Y30Y Short Receiver ATM Swaption Delta Hedged using Swap 86%
PAI = -Adjusted NPV (prev bus. day) x Latest Overnight Funding Rate x (Days/360)
KEY POINTS
• The NPV of the premium will offset the NPV of the swaption
Long has the opportunity to take the desired action on the swaptions up until 11am ET, & may use the
CME Deal Management System or send instructions via API rather than calling each counterparty.
• If the Long exercises in real-time, prior to 11 am ET cutoff, the Short will be notified in real-time.
• If the Long sets an intent to exercise at expiry, the Short will not be notified until the 11 am ET cutoff.
Setting Exercise Intent via DMS: Setting Exercise Intent via API:
• Immediate: Long selects Exercise or Abandon on the UI, • Immediate: A client submits an Exercise or Abandon
selects “Now” as the intent and clicks “Submit Instruction”. instruction to CME. Intent = Immediate on the message.
CME will exercise/abandon the position real-time • At Expiration: A client submits an Exercise or Abandon
• At Expiration: Long selects Exercise or Abandon on the UI instruction to CME. Intent = At Expiration on the message.
and clicks “Submit Instruction”. CME will exercise/abandon CME will exercise/abandon based on the Long’s instruction at
based on the Long’s instruction at the cutoff the cutoff
Offered free of charge to all market Firms using an third party affirmation platform will need to confirm
participants and includes all E&A actions with the platform the E&A actions they will support via the CME API
9:00 am ET • Long may begin exercising or abandoning positions via DMS or the API
• CME randomly assigns Shorts and sends instant notification via API to Platform and CMFs
(status updated in DMS)
10:50 am ET • Long may continue to exercise or abandon positions via DMS or the API
• CME Fallback Procedure: For positions that have not been exercised or abandoned
(“Open” state), CME uses a 10:50 am ET valuation to determine moneyness, along with a 10 bps
ITM threshold which is consistent with ISDA protocol
(If Long is ITM by 10 bps or greater, Exercise, else Abandon).
11:00 am ET • Any remaining open positions are exercised or abandoned by CME according to
the intent provided by the Long OR at the 10:50 am ET valuation determine by CME
• CME randomly assigns Shorts and sends instant notification via API to Platform and CMFs
(status updated in DMS)
8:00 pm ET • Trade register is posted to the CMFs FTP site displaying swaption and new swap status’
• Clearing Members participating in the Swaptions offering will be required to provide daily vol
cube submissions as the primary input into the pricing model
• Data submissions include normal/log-normal volatility, DV01, Price and Forwards
• CME calibrates pricing parameters based on the submitted prices. Outputs from the
calibration process include:
• CME volatility cube
• CME swaptions price and annuity
• Average and standard deviation across dealer submissions
Tenor 1Y, 2Y, 5Y, 10Y, 15Y, 20Y, 30Y 1Y, 2Y, 5Y, 10Y, 15Y, 20Y, 30Y
• Margin offsets of up to 91% are possible when swaptions are margined with cleared
interest rate swaps.
• Swaptions are also available for Portfolio Margining with CME Eurodollar, Treasury,
and Deliverable Swap Futures.
• Swaption margin matrix available in CME CORE that displays indicative margin results for
select swaption tenors and the swaps that were used as a delta hedge.
3 3
Deepa Josyula
New York: • +1 212 299 2368
• deepa.josyula@cmegroup.com
Harry Yeo
Singapore: • +65 6593 5581
• harry.yeo@cmegroup.com
Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are
ECPs within the meaning of section 1(a)12 of the Commodity Exchange Act. Swaps are a leveraged investment, and because
only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a
swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a
portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade.
Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group
or its affiliates.
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The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no
responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for
explanation purposes only, and should not be considered investment advice or the results of actual market experience.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules.
Current rules should be consulted in all cases concerning contract specifications.