Interest rate derivatives that bridge the gap between over-the-counter swaps and listed futures are set to launch in Canada later this year.
The Montreal Exchange is eyeing a September 2016 launch date for Canadian dollar interest rate swap futures that are based on methodology created by the Eris Exchange.
The contracts will follow Canadian interest rate swap market conventions and will be available in two, five and 10-year maturities.
Timing of the planned contracts coincides with new rules mandating collateralisation of uncleared derivatives exposures. From September, the largest dealers will be required to exchange initial and variation margin on their bilateral swaps, potentially pushing market participants towards centrally cleared products or listed alternatives like swap futures.
Compared to vanilla swaps that are cleared through central counterparties, listed futures carry an economic benefit with margin requirements equivalent to two-day Value at Risk, while OTC instruments attract five-day VaR margin.
“Regulatory reforms are transforming the interest rate swap market globally, with trading markets and clearing houses taking a larger role,” said Alain Miquelon, president and CEO of the Montreal Exchange in a statement.
“By offering this innovative new product, the Montreal Exchange will provide market participants with a transparent and cost-efficient benchmark product to complement the Canadian interest rate swap market, while also improving price discovery across the Canadian yield curve.”
Eris, which offers US dollar interest rate swap futures on its own designated contract market, has already licensed the methodology to the InterContinental Exchange and Johannesburg Stock Exchange to offer versions in euro, sterling and South African rand.
Open interest in Eris’ US dollar IRS futures currently totals 155,000 contracts, of which a third represents bespoke Flexes contracts that continue to attract OTC swap margin. CME’s deliverable interest rate swap futures – the biggest competitor to the Eris instruments – have garnered open interest of 60,000 contracts.
