Research Papers

The Office of the Chief Economist produces original research papers on a broad range of topics relevant to the CFTC’s mandate to foster open, transparent, competitive, and financially sound markets in U.S. futures, option on futures, and U.S. swaps markets. In this role, the papers are written, in part, to inform the public on derivatives market issues and can be freely accessed below. They are commonly presented at academic conferences, universities, government agencies, and other research settings.  The papers help inform the agency’s policy and regulatory work, and many are published in peer-review journals and other scholarly outlets.

The analyses and conclusions expressed in the papers are those of the authors and do not reflect the views of other members of the Office of Chief Economist, other Commission staff or the Commission itself.

Date Author Names Title
Lihong McPhail, Philipp Schnabl, Bruce Tuckman

Do Banks Hedge Using Interest Rate Swaps?

  • Our study examines whether U.S. banks use interest rate swaps to hedge the interest rate risk of their loans and securities.
  • Data from the largest 250 U.S. banks show that the average bank has a large notional amount of swaps, more than 10 times its assets.
  • However, after accounting for offsetting swap positions, the average bank has almost no exposure to interest rate risk from its swap positions.
  • While there is some variation across banks, with some bank swap positions decreasing and some increasing with rates, but aggregating swap positions at the level of the banking system reveals that most swap exposure are offsetting.
  • Therefore, as a description of prevailing practice, we conclude that swap positions are not economically significant in hedging the interest rate risk of bank assets.
Esen Onur, David Reiffen, Rajiv Sharma

The impact of margin requirements on voluntary clearing decisions

Journal of Financial Markets, Volume 68, March 2024

  • We study the incentives to voluntarily centrally-clear swaps by examining the impact of a financial regulation that changes traders’ incentive to clear.
  • Using unique regulatory data, we find that traders are much more likely to centrally-clear their non-deliverable forward (NDF) foreign exchange swaps after the regulation went into effect. There is not a similar contemporaneous change in central clearing of foreign exchange swaps that are exempt from the regulation.
  • The change in clearing rates is driven by the decisions of a small group of traders; those who are already clearing members of the clearinghouse. This finding supports the intuition that becoming a clearing member entails significant upfront costs, but results in substantially lower marginal costs of clearing for members.
  • Within clearing members, traders are more likely to agree to centrally clear if clearing leads to a reduction in the amount of collateral posted with the clearinghouse for both counterparties.
Christopher Burns, Daniel Prager

Do Agricultural Swaps Co-Move with Equity Markets? Evidence from the COVID-19 Crisis

  • We evaluate how groups of commodity traders react to changes in the VIX during the Covid-19 Crisis. Our results show that equity market shocks can affect traders in both commodity swaps and futures markets.
  • We find index swaps traders reduce their net long positions in response to tightening financial conditions, while commercial swaps traders absorb some of this risk by decreasing their net short positions.
  • Using proprietary data reported by swap dealers to the CFTC, we document the size and composition of 13 over-the-counter agricultural swaps markets
  • Total positions in these 13 agricultural swaps markets averaged $95 billion in total investment. In futures equivalent positions, this represented a little under half of total futures open interest between 2016 and 2021. 
  • Index investment represents the majority of OTC agricultural swaps activity. Index swaps activity represented 72% of all open swaps and $68.9 billion in notional value from 2016 to 2021. This contrasts with the futures market, where Commodity Index Trading activity constitutes about one-sixth of open interest.
Alex Ferko, Scott Mixon, Esen Onur

Retail Traders in Futures Markets

  • We characterize the behavior of individual retail traders in futures markets using  newly available data on overnight positions and required margins. 
  • Individual participants typically only appear for a handful of trades(median 4 trades lasting 4 days each) and have gains or losses of a few hundred dollars per trading event.
  • Retail traders generally follow a contrarian strategy and enter long (short) positions when the contract price declines (rises). 
  • In contrast to conventional wisdom that retail is biased toward long positions, traders enter into short contracts in similar amounts
  • We find evidence that larger dollar losses on the first trade is significantly associated with leaving the market permanently.
Eleni Gousgounis, Esen Onur

The End of an Era: Who Pays the Price when the Livestock Futures Pits Close?

Forthcoming at the American Journal of Agricultural Economics:

  • We evaluate the changes in execution costs for customers in the livestock futures markets around the CME’s decision to close down futures pits.
  • We find that the livestock pits offered high immediacy execution and attracted large orders prior to their closure.
  • After the pits closed, execution of electronic orders becomes on average speedier and more expensive for customers who used to be active pit users
  • Comparing overall execution costs, we find that these pit-user customers face a lower overall execution cost following the pit closure when we account for all their orders, pit and electronic.
John Coughlan, Allen Carrion

Public Pension Duration Risk, Interest Rate Swap Usage, and Transparency

  • We study the usage of interest rate swaps (IRS) by U.S. public defined-benefit pension plans, their role in interest rate risk management, and transparency to the public. 
  • We first describe the duration risk of these pensions, show that it is large, and review how it is commonly believed to be hedged with IRS. 
  • Using regulatory data from the CFTC, we document that the pensions collectively hold material positions in IRS. However, these positions are held by a minority of funds, are small relative to their duration hedging needs, and the net positions are often in the wrong direction to serve as hedges. Swaptions and interest rate futures are not generally used as substitute hedges. 
  • We analyze the public disclosures of pensions identified as IRS users in the data. We find that most are not sufficiently transparent to conduct interest rate risk analysis, some do not clearly disclose the existence of IRS in their portfolios, and the transparency of their disclosures is not significantly related to whether their IRS usage is consistent with hedging.
Alexei Orlov, Rajiv Sharma

Which Witch is Which? Deconstructing the FX Markets Activity

Global Finance Journal, Volume 60, May 2024

  • The paper provides a comprehensive overview of the activity in the foreign exchange (FX) derivatives markets, including futures, swaps, and options.
  • We analyze the behavior of various market participant groups before, during, and in the aftermath of the COVID-related market stress.
  • Certain client sectors (e.g., sovereigns and hedge funds), along with dealers, stepped in to provide USD liquidity in March 2020 by significantly increasing their long-USD swap positions. 
  • Client sectors are heterogeneous with respect to their liquidity needs and their aggregate positions are small compared to dealer inventories. 
  • The paper also highlights the heterogeneity of firms within a client sector by focusing on hedge funds’ USD/Euro swap positions—the most active client sector and currency pair in our data. 
  • FX dealers follow largely similar strategies, are competitive, and engage in multilateral netting arrangements to significantly reduce their risk exposure.
Pankaj Jain, Ayla Kayhan, Esen Onur

Determinants of Commodity Market Liquidity

Web Appendix

The Financial Review (forthcoming)
•            We examine systematic and idiosyncratic determinants of Amihud price impact and microstructure noise proxying for permanent and transitory components of commodity futures liquidity.
•            For idiosyncratic factors, we identify that excess hedging demand increases price impact and noise while active position taking (by market-makers) in excess of the hedging demand reduces noise.
•            For systematic factors, lack of competition among liquidity providers adversely impact liquidity, but this effect is mitigated if liquidity providers are well capitalized.
•            We also show that the Supplementary leverage ratio (SLR) makes holding inventory costlier and is associated with lower liquidity.

Esen Onur, David Reiffen, Rajiv Sharma

The Effect of Last Two Phases of the Uncleared Margin Rule on Participant Swap Decisions

Journal of Securities Operations & Custody, Volume 15, No. 3, 2023. Link

  • The Uncleared Margin Rule (UMR) was a global regulation that requires entities to post a minimum amount of collateral (margin) on their uncleared swaps.  The goal of the rule was both to provide greater security for uncleared swaps, and to encourage central clearing of swaps.
  • The rule was phased in over time, initially applying to the largest financial entities, while eventually covering virtually all swap traders.  We examine the impact of the final two phases on trading and clearing in Non-Deliverable Forward (NDF) foreign exchange markets. 
  • While the trade press suggested that imposition of the rule on the last two phases of entities would inhibit trading, we find little evidence of that.  We show that trading volume was largely unaffected by the extension of the rule to these additional entities.  
  • We find evidence that some of the newly in-scope entities reacted to the UMR by increasing their use of central clearing; from less than 9% of trades prior to phase 5 to over 15% after phase 6 went into effect.   
  • These changes were somewhat in contrast to the effect of previous phases.  In the earlier phases, the UMR largely affected the clearing decisions of entities that were clearing members of the London Clearinghouse.  In contrast, we observe large changes in clearing for phase 5 and 6 entities, even though none of those entities were members of the clearinghouse.
  • Overall, clearing in the NDF market increased from 31% prior to phase 5 to almost 44% after phase 6.  
John Coughlan, Alexei Orlov

High-Frequency Trading and Market Quality: Evidence from Account-Level Futures Data

Journal of Futures Markets, 43, 1126– 1160.

  • We use rich regulatory data on intraday transactions and end-of-day positions of traders to examine how participation of high-frequency traders (HFTs) affects market quality.
  • Panel estimation evidence shows that greater participation by HFTs is strongly associated with improvements in market quality, whereas higher rates of aggressive, directional trading produce an adverse, partially offsetting effect.
  • While futures contracts are sensitive to market uncertainty, as measured by the VIX, they are even more sensitive to own price volatility.
  • We take advantage of the 2015 change in CME's daily settlement methodology for agricultural commodities to address potential endogeneity using a fixed-effects difference-in-difference setup.
  • Our results are robust to relying on alternative estimation techniques, using overly conservative (clustered) standard errors, modeling various forms of cross-sectional and temporal dependence, as well as studying each market separately.