In an independently written article for the Association for Financial Professionals' Quarterly Magazine, Ira Kawaller provides a useful introduction to swap futures, specifically focusing on Eris as a hedging tool for smaller end users with less access to the OTC market. Kawaller is founder and principal of Derivatives Litigation Services, and an expert in derivatives and hedge accounting.
Read the article here
View Ira Kawaller's bio here
Eris Swap Futures are ideal hedging instruments for end users. Our modular video tutorials are set up to walk you through the essentials of what you need to know to get started trading. Feel free to watch the videos in sequence, or skip ahead to whatever is relevant.
Eris 101: Why Trade Eris Over Other Products (YouTube)
Eris 102: Ticker Conventions & Where to Find the Contracts (YouTube)
Eris 103: Understanding Eris Prices & Preparing to Trade (YouTube)
Eris 104: Determining Your Trade & Entering Orders (YouTube)
Eris 105: Settlement / Post Trade Tax & Accounting Considerations (YouTube)
View the presentation materials (without the video) here
Background
The Federally backed Main Street Lending Program (MSLP) will facilitate up to $600BN in LIBOR based loans for small and medium sized businesses
Eligible loans under the program will be offered at LIBOR +300 basis points, and will range from $500K to $25MM notional, amortizing over 4 years
Why Hedge?
3M LIBOR has fluctuated within an 80bp range between March and April, and uncertainty for the future of the index remains with the impending shift to SOFR
By comparison, 3-4y swap rates recently hit all time lows (0.30-0.35%) having fallen over 130bps from the start of the year
Borrowers can remove uncertainty and lock in fixed rate financing for 4 years at record lows by paying fixed and receiving floating on a swap hedge.
Eris Swap Futures Are Well Suited to Hedging MSLP Loans
The clearing mandate and recent volatility have made traditional OTC interest rate swaps much more expensive for smaller and midsize firms:
Increased margin/collateral requirements post crisis
Uncleared swaps may incur significant credit charges
Minimum FCM fees for cleared swaps of $10-20K per month
Eris Swap Futures offer the exact cash flow economics of OTC swaps, but with less than ½ the required margin upfront, much lower clearing fees, and no credit charge
Borrowers can more efficiently lock-in their all-in financing costs by selling 2, 3, and 4-year Eris Swap Futures (paying fixed and receiving floating) in $100K notional increments mirroring the underlying details of the loan
The example below shows the net borrowing cost on the first $10MM notional of a $15MM loan out to 3 years for a firm that expects to prepay at that time. Increased interest expense due to rising 3M LIBOR will be offset by a gain on the hedge, keeping the effective borrowing cost on that portion of the loan fixed at 3.30%. If the borrower wanted to hedge the full notional, it could sell 50 4Y, 50 3Y, and 50 2Y contracts to replicate the amortizing profile
To Get Started
For those already familiar with trading futures, contact your futures broker
Otherwise, contact info@erisfutures.com
Click here to read more about Eris contract details
In the latest BALM report, Ira Kawaller discusses the convergence of exchange traded futures and over-the-counter markets following Dodd-Frank legislation and the evolution of swap futures at CME Group that followed.
In addition to contract details and pricing conventions, Kawaller addresses GAAP accounting concerns for reporting entities, including preferred methods for prospective and retrospective effectiveness testing of swap futures.
The article concludes that while cleared swaps and swap futures can both serve the same economic functions with similar cash flow processing, futures will have a number of comparative advantages and effectiveness testing requirements should be easy to satisfy.
Click here to access the full article.
In the second trade note published in his ongoing Strategy Series, Thomas Browne demonstrates from first principles how Eris Swap Futures track the P&L of underlying interest rate swaps.
The paper further shows that the Eris price more accurately reflects the total return of a swap than comparing changes in par swap rates.
Finally, using regression analyses, Browne proves that even with different coupons and start dates, Eris Swap Futures can provide equivalent market exposure and substantially the same economic return as an IRS, acting as a highly effective replacement for OTC swaps.
Read the white paper here
In the first trade note of his Strategy Series, Thomas Browne provides a detailed introduction to Eris Swap Futures, put into context with Eurodollar futures and OTC interest rate swaps.
Eris Swap Futures can provide higher duration exposure than other fixed income futures, including convexity, making for a more natural fit for longer dated fixed income trading
Compared to OTC IRS, Eris offers concentrated liquidity using IMM dates, futures margin benefits, greater accessibility, and efficiency of unwinds
Eris Swap Futures, quoted in price and tracking total return, can allow for more simple mean reversion trading opportunities than OTC swaps with weights calculated using only yield
View the white paper here
In its Q1 update, CME Group highlighted its margin optimization capabilities to generate record savings for clients.
Responding to client feedback, CME Group noted new work being done to expand the products available for portfolio margining vs cleared swaps, specifically including Eris Swap Futures.
Read the full newsletter here.
In the latest BALM newsletter, Ira Kawaller discusses the convergence of exchange traded futures and over-the-counter markets following Dodd-Frank legislation and the evolution of swap futures at CME Group that followed.
In addition to contract details and pricing conventions, Kawaller addresses GAAP accounting concerns for reporting entities, including preferred methods for prospective and retrospective effectiveness testing of swap futures.
The article concludes that while cleared swaps and swap futures can both serve the same economic functions with similar cash flow processing, futures will have a number of comparative advantages and effectiveness testing requirements should be easy to satisfy.
Click here to access the full article.
In the first trade note of his Strategy Series, Thomas Browne provides a detailed introduction to Eris Swap Futures, put into context with Eurodollar futures and OTC interest rate swaps.
Eris Swap Futures can provide higher duration exposure than other fixed income futures, including convexity, making for a more natural fit for longer dated fixed income trading
Compared to OTC IRS, Eris offers concentrated liquidity using IMM dates, futures margin benefits, greater accessibility, and efficiency of unwinds
Eris Swap Futures, quoted in price and tracking total return, can allow for more simple mean reversion trading opportunities than OTC swaps with weights calculated using only yield
Click here to request the full white paper.
