The number of contracts traded over the fledgling Eris Exchange plummeted in July, and while August is showing improvement the more important development may be the steadily growing open interest for the exchange’s Flexes interest-rate futures contracts, which offer similar benefits to bilateral swaps.
Eris Exchange is US-based futures exchange offering swap futures as alternative to traditional OTC interest-rate swaps.
Average daily volume for Eris’s Flexes and Standards contracts jumped to 2,148 contracts in May and to 2,365 contracts in June, but it fell to 812 contracts in July and as of Aug. 21 it was 1171 contracts.
Such volatility is not unexpected, given the exchange routinely goes back and forth from trading a few thousand contracts a day to none, as users get used to the new futures products that were actively launched in April. More telling, the open interest, or the number of contracts outstanding, has continued to rise, hovering around 30,000 contacts in May and June and rising to 37,492 contacts in July and 47,300 as of Aug. 21.
“Increasing open interest suggests people are putting on trades because they have risk to manage,” rather than simply trading the contracts, said Kevin Wolf, Eris’s chief business and product development officer.
Those numbers include the exchange’s Standards and Flexes products, although the Flexes contracts, which allow investors to choose dates and coupons and synthetically replicate the economics of a bilateral swap, have steadily increased their share of overall trades on the Eris platform. From April through June, the Flex contracts made up no more than 15 percent of trades, and the Standard contracts, which more closely resemble standardized, traditional futures contracts, represented the rest. In July, the percentage of Flex trades increased to 56 percent, and the number has hovered just under 50 percent so far in August.
“Flexes are more complex to onboard, and people may simply be getting more comfortable with the product,” Wolf said. “Some may be migrating from Standards to Flexes.”
Most corporates are probably not yet looking at Flexes, which enable more customization than other exchange-traded futures but less than the bilateral swaps they have traditionally favored. Corporate end-users are exempt from the clearing requirements faced by most swap market participants, and they await final margin rules for uncleared transactions from European and the US regulators.
“It’s not surprising that open interest in the swap contracts is increasing as financial institutions, REITs, insurance companies and other entities that are active in interest-rate risk management and who will not qualify for the end-user clearing exemption would look to use them as a not-so-perfect-hedge,” said Jiri Okochi, CEO of derivative valuation firm Reval. “I don’t see …. non-financial corporates using them for debt hedging, as these counterparties still prefer a ‘perfect’ hedge and no margin posting as it stands today.”
It has also helped that Eris has continued to sign up more clearing firms. Most recently, RJO’Brien, Dorman Trading and RBC Capital Markets signed on, bringing the total to 16, including giants such as ABN-Amro, Bank of America Merrill Lynch and Barclays.
Wolf said the exchange has brought new market makers onboard, although he declined to name them. Eris was started by a handful of Chicago’s biggest proprietary trading firms, including Getco LLC, DRW Holdings and Infinium Capital Management, and they provide liquidity for Eris’ products. Eris announced last December that Morgan Stanley had invested in the exchange and would provide liquidity as well.