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Back to the Future
As the future of swap clearing in South Africa remains uncertain, abroad the landscape has already shifted. CFTC regulations currently favour the trading of futures over swaps,
In November the CME launched a physically settled interest rate swap future, based on the patented contract developed by Goldman Sachs in 2007. Under current CFTC regulations, the margin recommendation for swaps is based on a punitive 5-day holding period, as opposed the the 1-day holding period recommended for futures contracts. CME estimates the following margin savings on futures traded swap contracts vs. standard centrally cleared swaps:
Although National Treasury and the local market seem to take their lead from the CFTC and BIS regarding issues of central clearing, it remains to be seen whether the same preference will be reflected in the local market.
One interesting thing about the preference is that it takes little cognisance of the relevant contracts liquidity. Under this framework a (likely illiquid) Can-Do Future would attract a lower relative margin than what could be a very liquid IR swap contract. Think back to Yield-X jSwaps and how illiquid they were in comparison to the actual swap contracts.
The CME swap futures do offer the crucial innovation that the underlying swap is deliverable, with the CME as the central counterparty for the resultant swap position (removing pricing discrepancies due to any credit considerations). This swap is traded at a fixed coupon (designed to correspond roughly to the fair swap rate for the relevant tenor), with the NPV of the swap fluctuating and being margined accordingly.
Interest in the products is significant enough that Bloomberg is currently suing the CFTC to change the treatment of swaps and futures. It remains to be seen how the regulations will play out, but the results will have significant market impact. Although some circles consider the contracts effectively equivalent, there are certainly documented problems with attempting to hedge contracts with futures on matching underlyings.