Fuzzy Field In The Field Limit Swap Swap Futures "Coat"

After the promulgation of the Dodd Frank act, the regulation of the swap market is becoming increasingly stringent.

The swap market with many regulatory chains has lost the advantages of flexible trading in the past.

Against this background, investors are starting to focus on possible replacement products, and Swap Futures is a good choice.

Exchange derivatives and other financial derivatives have always been in the form of OTC pactions.

Investment banks create customized risk management products for customers, which also greatly increases the difficulty of supervision while meeting the individual needs of customers.

The pain of the subprime mortgage crisis has made people realize the importance of strengthening off site financial supervision. The promulgation of the Dodd Frank act in 2010 means that the OTC derivatives market is formally incorporated into the regulatory scope.

The seventh chapter of the Dodd Frank act: "pparency in Wall Street"

"Also known as" OTC derivatives legislation "has established a new regulatory framework for off site derivatives.

The "pparency and responsibility of Wall Street" Abolished Regulatory exemptions for most of the OTC derivatives before, so that the swap was included in the regulatory scope of derivatives.

Rules, financial institutions and non hedging positions must be centrally liquidated through designated clearing houses.

Under the new rules, the exchange should not only adopt standardized contracts to meet the requirements of centralized liquidation system, but also the participants and dealers of all kinds of swaps must register with the regulatory authorities, fulfill the obligations of large paction reporting, submit paction data to the "swap data repository", and be bound by the limit of positions.

The new rules require that the clearing of off site swap products be pferred to a regulated platform, which directly promotes the rapid expansion of the Cleared Swap.

Clearing exchange is a highly standardized exchange contract, which can be split into two swaps at the central clearing house for centralized clearing when submitted to the clearing house for clearing security while retaining the flexibility of OTC trading.

This is the basis for exchanging futures.

On the basis of the centralized clearing of the Swap Futures, the intra floor pactions were further realized, thereby enhancing market liquidity and facilitating bilateral pactions by reducing the threshold of bulk trading, so that the flexibility of OTC pactions could be maintained.

At the same time, because of the "coat" of futures, the supervision of such products has weakened to some extent, which has made it more flexible to operate.

In addition, the lower margin ratio of futures products has raised the efficiency of capital utilization for relevant investors.

Both ICE and CME have introduced Swap Futures on the basis of the original clearing exchange products.

Since October 13, 2012, ICE has completed the seamless conversion of all its OTC energy swap contracts to swap futures contracts in only two days.

In December 3, 2012, CME launched its convertible interest rate swap futures contract with its focus on clearing interest rate swap contracts as its subject matter.

Swap Futures are divided into two main categories. One is ICE exchange futures, which are directly converted from clearing exchanges; another is CME Swap Futures, with clearing exchanges as the subject matter.

Swap Futures with single cash flow swap

A forward contract can be equated to a cash flow swap in the future.

Suppose that a company signed a May iron ore forward contract, which agreed to buy 1000 tons of iron ore at the price of 450 yuan / ton, and sell it at the price S in the spot market at the expiration of the contract.

Because S is unknown, the whole process can be regarded as the exchange of fixed cash flow expenses of 450 yuan / ton (1000 tons) =45 million and S cash flow income of 1000 tons.

Furthermore, forward contracts are equivalent to buying 10 hand iron ore futures contracts in May.

If the delivery method is adjusted to cash delivery at maturity, the cash flow swap and futures contract conversion can be realized.

Based on this, ICE can complete the seamless conversion of all energy exchanges to futures within two days, which proves that although trading on the ICE platform for more than 10 years, there is no substantial difference between energy futures and energy exchange.

Facts have proved that the single cash flow clearing exchange in centralized clearing is only one step away from futures.

At present, the exchange of iron ore (clearing exchange) and iron ore index futures (Swap Futures) of Singapore Exchange (SGX) are still coexisting.

The two contracts are almost the same except for trading units and trading hours.

The bargaining threshold of iron ore index futures is 5 hands. When the index futures contract volume is above the volume of swap units, the swap agreement can be traded on the bilateral bargaining way, so that the advantages of the swap contract OTC paction can be successfully incorporated into the swap futures contract.

Multi cash flow swap swap futures

More common swaps usually exchange cash flows at some future time points, so they can not be converted directly into futures contracts as single cash flow swap contracts.

Multiple cash flow swaps can be divided into several single cash flow exchanges according to different exchange time points, and they can be divided into two sets of cash flow contrary to the revenue and expenditure direction of the two sides of the contract. There is no essential difference between the two.

The discounted value of the two groups of cash flows used for exchange usually varies, and the value of the exchange contracts will be changed by the influence of cash flow factors. Therefore, the multi cash flow exchange contract can be traded on the basis of the forward value of the exchange contract. On the basis of the standardized exchange contract in the field of centralized liquidation, the exchange futures are derived from the liquidation exchange as the subject matter.

Interest rate swap is a typical multi cash flow swap. Statistics from the International Bank of clearing (BIS) show that in the second half of 2013, the nominal capital of the non interest rate swap contract amounted to US $461 trillion, accounting for 65% of the market share of the OTC derivatives market.

CME's interest rate swap futures contracts have also become increasingly active since its listing. This article takes this as an example to illustrate the characteristics of such swaps.