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New !! CME Fed Funds-Eurodollars Exchange Spread

  1. In the first half of 2018 the CME will be rolling out a Fed Funds versus Eurodollars exchange spread. This is very, very exciting news - I personally anticipate a great deal of commercial, institutional, and large spec interest.

    I am providing a link below for you to register for the webinar, which will be held on Tuesday, November 28, 11:00-12:00 pm US Central time.

  2. Hehe, you are very cute bone. You get so excited about new spread possibilities, like a dog getting a fresh new...bone? This post reminded me of how yesterday we got a new cow bone for our dog...Whenever he gets a new one he sits and gnaws on it for hours while ignoring everything around him. :)
  3. You're so right - I popped wood the second this notice from CME appeared in my inbox. :rolleyes:
  4. It's not a new spread. The TED spread is probably the most watched IR spread in the world.
  5. The ease of execution is the big deal. As Mav eluded to it neatly packages a very important spread into a singular consumer product basically. It's essentially unsecured bank credit versus unsecured commercial credit - important indeed.
  6. New to the CME I guess then.
  7. Well, most players in the OTC market did this in cash. Now the home gamers can get involved. So I agree with Bone, this is a great spread and I suspect it will be very popular. You might even like it Overnight!
  8. Everyone involved in financing tracks this relationship - including the Fed.

  9. Also known as LIBOR-OAS. I will make a prediction that it will be a spectacular failure :)
  10. Very possible. The cash market really dominates this. But I think for a lot of people, it will at least make this spread easier to track and collect data on. I think another reason Sle you might be right is most of the large fixed income prop firms in Chicago have gone away. I'm still glad they are offering it.
  11. Erm, are you guys forgetting smth?

    The future of the reference rates for BOTH of the legs of these wondrous spreads is uncertain. If the various regulators and committees have their way, by 2021 there will only be one rate to rule them all. Obviously, it's all complicated, but this joy and excitement might be, sadly, short-lived.

    Still, I applaud the CME for finally doing something like this. There are certain really pesky technical issues with the way LOIS basis is currently traded (not cash, as this ain't a TED spread, but rather two cleared OTC derivative contracts) and this should hopefully fix them (mostly, issues related to convexity, as well as daycount and compounding conventions).

    To be sure, LIBOR-OIS basis is VERY different to treasury asset swap spreads, so Mav is incorrect, cash doesn't dominate this mkt. LOIS and other unsecured term basis mkts are reasonably large and they all trade, at least for now.

    Why don't they do LIBOR/GC spread futures instead? At least, they will have a future (pun intended).
  12. What's your prediction about the Bitcoin contract ?

    I don't think the FF-GE contract will necessarily fail per se in the sense that there's already volume and open interest there. It's a consumer package. It's a nice pretty new label. And it will make it easier to trade. I make no predictions about volume though. It's a good idea on its' face IMO.
  13. On the prop side it did marty. I know 3 firms in Chicago that did 90% of their trading on the cash side of this spread because that is where the edge was.
  14. Yes, the invoice spreads and the like trade, vs LIBOR and OIS both, Mav, but it's not the same spread. Not even close. They're two distinct mkts with their own dynamics. Trust me on this, pls, I am still staring at this sh1t all day long.
  15. I think bitcoin contract has a chance, though I think they should have made it physically settled (feels that something like bitcoin should have an active EFP market).
    This has low chances of success because it’s a liquid OTC product that’s well established and has little interest to non-institutional traders. Historically, whenever exchanges try to introduce a product like that they fail.
  16. EFP for Bitcoin would be a magnet for money laundering. Physically settled futures would have made that quite convenient - and as you allude to would have made that futures contract quite appealing.

    Historically, futures exchanges have an atrociously bad record for successful contract introductions. Just shit.
  17. Actually, hold on a sec...

    @bone are you saying that this will be a new spread contract with its own spec? Or will this just be a new market on the exchange where I can more readily and efficiently trade the spread between the standard FF and GE contracts?

    If it's the latter, I can tell you right now that it's a total waste of time and, IMHO, I can almost guarantee that it will fail miserably.
  18. Marty, I will attend the Webinar on November 28 and report back here. Great question and I have not seen the contract specs.
  19. I would not know a good spread if it sat on my face.
  20. :D
  21. I was under the impression the eurodollar contract days were numbered. Anyhow exciting news!
  22. 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.
  23. 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.

  24. 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.
  25. Marty, I take your points. The impetus for my post was to give smaller spec account spread traders another option to consider.
  26. 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.
  27. 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).
  28. 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.
  29. 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.
  30. 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!
  31. It can be seasonal, to some extent, although the dynamics can be complicated. It mostly mean reverts, but, again, it can be complicated. I am not sure how you would chart it on IB. You'd need support for continuous futures and I don't know if IB can do it.
  32. [​IMG]
  33. [​IMG]
  34. Well, if you put it like that, Mav, I shall happily yield the stage and let a better man explain this stuff... Please don't hesitate.
  35. Interpretation: Interest Rates are a giant rabbit hole. In fact, the best known texts on the topic are about as thick as a 1980's NYC phone book. There is no way I could possibly expend the time and energy to type up a lucid, complete explanation of bank rates and corporate debt rates. One post could take up hundreds of pages in a thread in fact.

    So, best to just say "it's complicated".

    Speaking for myself only, I can empathize with Marty's position.

    Having said that - nothing wrong with charting consolidated, continuous futures data. This isn't a fair comparison in terms of complexity but FWIW I personally know very little about the Sugar market but it has been one of my best trades (intramarket spreads) for several years now.
  36. Aye Marty, is there ever a time of year where you lighten up? It's funny...you can laugh a little. LOL.
  37. Ho-ho-ho :)
  38. That's a little better.
  39. The problem with sugar vs rate spreads is that the sugar spreads referred to are intramarket and the rate spreads are inter-market with ratios that can change. This is a total hairshirt to deal with if the ratios change mid-timeframe somewhere (let alone if someone were simply just charting it and most platforms wouldn't even know how to deal with it). It's why I'd rather use the spreads of the outright yields in that case.

    With the exchange traded ICSes you can also chart them continuously but if they're net-change then back to super hairshirt again.
  40. I used to trade inter market interest rate spreads exclusively in the 1990's and early 2000's - now 95% of the interest rate trades are intra market spreads like a Eurodollar butterfly for example. It's just easier to model and trade for me. Same holds true for most of my clients - they seem to prefer the intra market spreads. Do some Euribor as well.
  41. A good broad-brush overview of interest rates would be 1- 2 pages. Not that you're obliged to write it!
  42. Not Marty. It would be an opus.

    I took a class (sponsored by LIFFE) that lasted for one week just on LIBOR in the 90’s. And it wasn’t strategy specific. In the late 90’s I took the DTB Eurex test and the study guide was a pretty thick binder. As I recall, about half the people that took that test didn’t pass it first time around.
  43. I just made my way through this tome (The Eurodollar Futures and Options Handbook by Galen Burghardt). It is a bit dated but I was told that it is a must read for anyone wanting to trade STIRs. Learned a lot. I just mention this in case anyone wants to know more about the Eurodollar.
  44. Galen's a good egg. He might appreciate hearing you liked the book - try him at galen.burghardt at bridgealternatives dot com.
  45. Yes, Burghardt's stuff is always good, since they really cover the basics amazingly well...

    The problem with LIBOR is that there is a lot of regulatory crap that has gone into effect post-crisis. People spend a lot of time looking at all the gory details and it's not pretty. Of course, the ultimate irony is that it looks like LIBOR will not matter for too long now.
  46. Might actually do that, thanks for the email.

    @Martinghoul Do you have an opinion on SOFR based futures and options? Do you think they will replace Eurodollars, maybe after a transition period where SOFR is published side by side with LIBOR? As far as I am aware there is no end date to LIBOR, but it will probably phase out slowly.

    "Panel bank support for current LIBOR until end-2021 will enable a transition that can be planned and can be executed smoothly. The planning and the transition must now begin."

    Source: https://www.fca.org.uk/news/speeches/the-future-of-libor

  47. I would highly recommend Burghardt's book on the longer end of the curve as well called "The Treasury Bond Basis". As well as "The Bond Market" by Christina Ray.
  48. Something is coming, I am reasonably sure... All the regulators are very keen on getting rid of LIBOR, especially the FCA here in the U.K. It's not clear to me how all this will happen and there are tons of uncertainties. Still both Eurodollar and Fedfund futures are likely to go away or change, as well as many other derivatives.
  49. Marty, invent a contemporary cash settled proxy futures contract then file a patent. Sell patent to a regulated futures exchange. Use proceeds to live like Hunter S. Thompson.
  50. Ha, I can invent whatever random thing any day... Issue is that it needs to reflect some commonly used, healthy money market rate. At the moment, there just ain't one.
  51. I've been thinking about the CME's rational to introduce this contract. Two things come to mind:

    1) They want to attract liquidity to the Eurodollar
    2) They want to show that they can handle different roll dates, possibly in preparation for a SOFR vs. Eurodollar ICS to transition the period until LIBOR phases out.

    I don't know, but I'm kind of excited about this new contract. If there is enough liquidity, I will definitely trade it.
  52. well. not all new thing is going to attract lots of traders.

    Just look at the recently launched Copper financial futures. volume traded is very low.
  53. It's one of the most liquid contracts in the world. Funky new products aren't going to add liquidity - monetary policy change will. The exchanges of course have no control over this.