The Commodity Exchange Arena Shifts to ‘Swaps’

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The Commodity Exchange Arena Shifts to ‘Swaps’

October 12, 2020

The global commodity exchange is buzzing with activity. The world’s largest commodity exchange prerogatives are hustling forward to use the newly formed regulations to their benefit. The clearing and trading of energy swaps is the target.

The Chicago based CME has fallen further behind with the approximated yearly business of securing £747.8 million over the counter swaps to its arch nemesis ICE. Both Intercontinental Exchange (ICE) and the CME Group Inc. are now scurrying to cleave an upper hand by modifying most of the cleared energy swaps into futures. Thus the swaps will be absolved from Commodity Trading Commission regulations that come into force today.

The switch seems to be perfectly logical as oil and natural gas futures contracts that were recently renamed are very similar to swaps that many companies such as Glencore or BP have been using constantly. To the energy industry, clearing has always been the backbone since the Enron meltdown back in 2001. The energy industry is benefitting hugely with the switch to futures.

Commodity Futures Trading Commission’s new rules have made swapping much more stringent. The rules warrant for a higher capital if the trade involves more than $8 billion in swaps annually. The exchange that offers the most hassle free transition is bound to win a larger volume. Stakes are high for both the exchanges. OTC energy clearing consisted of around 30 percent of ICE’s revenue in 2020 and 9 percent of CME’s revenue.

ICE has been predominating with its business since the past few years. Its volume has doubled and that of CME has slipped considerably. Last year alone saw ICE conduct energy swap contracts as much as four times more than CME and this year also ICE is going strong, with volumes about five times larger than CME.

Energy swaps being policed

The change in the rules is aimed at the Dodd-Frank reforms that are meant to restrict the OTC derivative market, which was blamed for the 2007-2008 economic downfall. The switch ensures more money for the clearinghouses. A major portion of the swap trading currently occurs over the counter. With the new rules in place, the revenue for clearing houses can skyrocket to about $2.1billion in 2 years from now.

A swap generally involves a trader on one side to pay a fixed price for a commodity periodically while the trader on the other side pays the market price of the commodity. It is similar to a futures contract which is aimed at selling or buying a pre determined amount of a particular commodity at a date in the future. Swaps were usually traded far away from the exchanges and were never in the crossfire like now.

The future market

ICE has responded firmly to the change in regulations by stating that it will be changing all of the energy swaps it owns to futures over the weekend. The CFTC has also approved the move. The transaction for ICE is very simple as most of its liquid swaps are traded on its electronic platform. The transition from swaps to futures also ensures that the markets remain transparent.

The CME on the other hand has a somewhat complicated pathway. It will pass a set of new rules to enable easier replacement of swaps with futures for its traders. CME’s Clearport contracts start as swaps and end as futures during clearing. It will be allowing its users to continue this affair away from the exchange. CME also does not have any liquid trading avenue which is bound to make the transition slightly problematic.

Binary options today

Both ICE and CME are neck to neck with natural gas swaps that comprise a whooping 81% of the OTC energy volume of ICE and 57% cleared energy swaps as per CME’s Clearport data from both the exchanges.

The ICE is going strong this year. It has successfully cleared around 2 million over the counter energy contracts on a daily basis for half of this year. The clearing percentage has spiralled up to 25 percent from its average for the previous year and doubled since 2009.

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CME on the other hand has cleared around 440,000 contracts on a daily basis this year, which is close to its last year’s average and has slumped by 10 percent since 2009.

If anything the new regulations are likely to bring about more stability to the dwindling market. By bringing the swaps under the safe havens of clearing houses, traders are likely to gain confidence as they are assured of some guarantee from the clearing houses. Hopefully the new rules will bring about a bullish trend in the days to come as opposed to the bearish market of today.

Bank your options on Call towards any bullish trends after the new regulations come into force today. The commodity market is likely to go bullish as the CFTC enforces the new reforms.

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ICE shifts OTC energy swaps to futures

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Weekly Swaps Report

As of July 31, 2020, OCE has introduced a number of methodology improvements to the Weekly Swaps Report. These changes primarily affect the transaction summary tables, though there are a number of less significant shifts in the position reports. The changes aim to ensure that the Weekly Swaps Report represents, as accurately as possible, the market-facing trades that occurred during the reporting week, as well as the open swap positions that transfer risk between independent entities (e.g., omits inter-affiliate positions).

Though the methodology changes are too numerous to fully list in this note, we outline a few of the more significant adjustments below. Improvements include:

  • Better identification of duplicative records across SDRs
  • More granular assignments of jurisdiction and grade to credit trades and positions
  • Updated inter-affiliate identifications
  • More extensive tracking of swap lifecycle events, such as allocations or compressions
  • Other data cleaning and data standardization efforts

Though we believe these to be broad, comprehensive changes to the report, we continue to work to improve the accuracy and clarity of the report. We welcome comments and questions on the report, as well as the recent changes; these can be sent to [email protected] .

What is the CFTC Swaps Report?

On January 1, 2020, certain swap market participants began reporting new and historical swap data to SDRs pursuant to 17 CFR Part 45, and the Commission began the process of analyzing these new data and incorporating them into the CFTC Swaps Report.

The CFTC Swaps Report is designed to be a valuable public service due to its unique combination of data aggregation, free availability, and weekly publication frequency. The CFTC Swaps Report aggregates a comprehensive body of swap market data that was not previously reported to regulators or regulated entities, and makes that information freely available in a form that is readily usable by both market participants and the general public. The swaps market data included in publications produced by entities such as the BIS, ISDA, and the Office of the Comptroller of the Currency vary in scope and granularity, but none corresponds directly to the data stored in the CFTC’s SDRs.

The CFTC Swaps Report complements the data made available to the public pursuant to the requirements of the Commission’s regulations governing Real-Time Public Reporting of Swap Transaction Data (17 CFR 43). These data reflect pricing information, contract terms, notional value, and more, and are published at the transaction level and in real-time (more frequently than the weekly production of the CFTC Swaps Report). This level of specificity will be highly valuable in several ways, especially in enhancing the price discovery function of the swaps market; however, these data will be disaggregated (reported as individual transactions), and any individual stream or production of these data will reflect only those transactions that are reported to a single SDR. The CFTC Swaps Report is designed to aggregate these data across SDRs and across regular intervals of time to produce useful, informative summary tables. Further, the CFTC Swaps Report presents only market-facing swaps transactions, i.e. those transactions executed at arms-length between non-affiliated entities, which allows the public a view of the competitive marketplace.

The CFTC Swaps Report represents only those swaps that are reported to the CFTC’s registered SDRs by swap market participants. The CFTC Swaps Report currently incorporates data from three SDRs (CME Group SDR, DTCC Data Repository, and ICE Trade Vault); however, data from additional SDRs could be incorporated in the future. (Bloomberg SDR became operational on May 12, 2020 and closed on August 13, 2020)

The Dodd-Frank Act requires that the Commission publish a report on trading, clearing, participants, and products in the swaps market on a semiannual and annual basis. (CEA Section 2(a)(14)). The Commission has elected to publish the CFTC Swaps Report on a weekly basis. This weekly publication frequency will allow members of the public and market participants to gain a more thorough understanding of developments in the swaps market.

The CFTC Swaps Report is published every Wednesday at 3:30 p.m., unless otherwise noted. See the Release Schedule for more detailed information.

The Commission welcomes continued feedback from market participants and members of the public regarding the format, classification structures, and supporting documentation of the CFTC Swaps Report. Submit questions or comments on the CFTC Swaps Report to [email protected] .

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