New !! CME Fed Funds-Eurodollars Exchange Spread

Discussion in 'Financial Futures' started by bone, Nov 16, 2017.

  1. bathrobe


    I was under the impression the eurodollar contract days were numbered. Anyhow exciting news!
    #21     Nov 16, 2017
  2. OKI, I've consulted some knowledgeable peeps...

    This, IMHO, is gonna be DOA, as it's just a new mkt on the CME for a ratio'd spread between existing ED and FF contracts. It doesn't actually address the concerns around mismatched dates that currently make the OTC version significantly more sensible for institutional investors. Unless the CME decides to massively improve the margin netting between ED and FF, I can't imagine any reason why I'd want or need to be involved.

    Besides, as I mentioned, both of the reference rates are likely to go away eventually...

    Another irony of this is that the somewhat more promising trsy GC futures, which could allow one to trade the LIBOR-GC spread, are listed on ICE.
    #22     Nov 17, 2017
    i960 likes this.
  3. bone

    bone ET Sponsor

    Here is the link the recorded CME Webinar on the Eurodollar versus Fed Funds exchange traded futures spread. As far as esoteric interest rate topics go this wasn’t terribly long or boring.

    This is essentially a proxy for unsecured commercial debt (GE) versus unsecured bank debt (FF). This spread is heavily traded in the cash market because there is a better edge in the bid-ask. For my purposes the futures provides far greater capital margin efficiencies.

    Personally, I have a great affinity for the exchange futures spreads because I swing trade them and don't want the execution hassles. YMMV.
    #23     Nov 30, 2017
    AlexxS likes this.
  4. Strictly speaking, bone, you're incorrect... Both LIBOR and FF are both unsecured interbank rates, albeit involving different underlying panels of banks.

    As to this spread, the more I ask people questions about it (including the people who provided the main impetus for the introduction of this spread on the CME), the more I have to conclude that it's DOA. Now I've learned that brokers hate it. The CME says that the big selling point is the very favorable margin netting terms (implies arnd a 65% reduction in net margin, relative to a spread done via the outrights). However, I still don't understand how they intend to apply this in a mixed portfolio.
    #24     Nov 30, 2017
  5. bone

    bone ET Sponsor

    Marty, I take your points. The impetus for my post was to give smaller spec account spread traders another option to consider.
    #25     Nov 30, 2017
  6. Ye, sure... I just think it's one of those things that's just a little bit too weird to work.

    I mean if they wanted to let peeps trade LOIS the way most institutionals would do it (two derivative contracts with matched dates and mostly matched conventions, so that everything is in line), they should have introduced a new FRA/OIS spread futures contract. However, I guess they really thought it was too much trouble, especially given the uncertainties around the rates themselves. So they settled on this "bastardized" version of the spread, which has all the same drawbacks and whose only advantage is the more generous netting. I just don't think it's good enough, IMHO.
    #26     Nov 30, 2017
    i960 and AlexxS like this.
  7. And now it turns out that the margin stuff is a red herring... The 65% reduction is a result of the regular netting that would occur even if you legged ED contracts vs FF, w/o using the new high-falutin' spread mkt (just as I suspected).
    #27     Nov 30, 2017
  8. i960


    So it's an execution instrument just like the treasury spread ICSes basically. The margin offset with spreads vs legged outrights isn't something unique to this spreads but just a side effect of SPAN like all the others.
    #28     Nov 30, 2017
  9. Yeah... For an institutional, there's apparently some relative margin benefit vs the OTC version of the LOIS trade, but this is offset by the various imperfections.
    #29     Nov 30, 2017
  10. traderjo


    so at retail level should one consider trading it? a beginner questions, is it seasonal? does it mean revert? how to chart historical movements ( On IB) ? when the spread as a Exchange Traded product just started out few week ago but was always there as legged version!
    #30     Dec 17, 2017