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
Lynn Riggs, Esen Onur, David Reiffen, Haoxiang Zhu

Mechanism Selection and Trade Formation on Swap Execution Facilities: Evidence from Index CDS

UPDATED TITLE : Swap trading after Dodd-Frank: Evidence from index CDS

Journal of Financial Economics Volume 137, Issue 3, September 2020, Pages 857-886

https://doi.org/10.1016/j.jfineco.2020.03.008

  • This paper uses a unique set of message data of messages from a Swap Execution Facility (SEF) to analyze the choice of trading mechanisms.
  • The paper shows that the number of dealers from whom a customer requests quotes depends on characteristics of the customer’s trade, such as the size of the transaction.
  • The paper also shows that whether the dealer responds to a quote request also depends on the size of the transaction as well as how many other dealers are being asked for a quote.
  • The paper finds that past trading relationships are also important determinants for customers’ quote requests and dealers’ responses.
Lee Baker, Lihong McPhail, Bruce Tuckman

The Liquidity Hierarchy in the U.S. Treasury Market: Summary Statistics from CBOT Futures and TRACE Bond Data

The Journal of Fixed Income Summer 2020, 30 (1) 90-99

https://doi.org/10.3905/jfi.2020.1.091

  • The note combines the relatively new source of data on cash transactions from FINRA with futures transactions data available at the CFTC to describe a “liquidity hierarchy” in the U.S. Treasury market.
  • The analysis shows that while overall risk volume is greater across all cash securities than across all futures contracts, the liquidity hierarchy is more complex, with certain futures contracts more liquid than certain cash securities, and vice versa.
  • Futures contracts play a special role in liquidity-challenged environments. The relative amount of risk traded through futures contracts is higher on days with large price movements and is larger at times outside of U.S. trading hours.
  • Average trade size, in risk terms, is much higher for cash securities than for futures contracts. This is most likely due to the higher prevalence of automated trading in futures markets, which, in turn, results in futures trades being broken down into smaller orders for execution.
Eleni Gousgounis, Esen Onur, Bruce Tuckman

Large Order Size Liquidity in Treasury Markets

  • We estimate the mean-variance frontier of execution costs of large orders in the ten-year treasury futures market.
  • We introduce a methodological innovation to infer the urgency of a large parent order from the pattern of its execution.
  • We find that the mean-variance frontier has improved over the time period of our study, which is from 2012 until 2017.
  • We also find that the costs of executing large orders on behalf of customers are significantly greater than the costs of executing orders for house accounts.
Eleni Gousgounis, Esen Onur

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

(An earlier version of this paper was made available with the title “Is Pit Closure Costly for Livestock Customers?”)

  • We evaluate the changes in execution costs in livestock markets around the CME’s decision to close down futures pits.
  • We specifically focus on the changes in execution costs for customers who used to get their fills on the pits and compare their execution costs to those of the non-pit user customers.
  • We find that execution costs in the electronic market have generally decreased for customers in the live cattle and lean hog, but not for the feeder cattle futures market.
  • Execution costs in the electronic market have increased for pit user customers in the live cattle and lean hog futures markets. We do not find evidence associating changes in execution costs with increased trading with high-frequency traders.
  • We also find that overall execution costs, including both pit and electronic orders measured on per-contract basis, have decreased for pit-user customers. We offer up reasons that might be driving this change.
Lee Baker, Richard Haynes, John S. Roberts, Rajiv Sharma, Bruce Tuckman

Risk Transfer With Interest Rate Swaps

Updates: 2018 Q1, 2018 Q2, 2018 Q3, 2018 Q4, 2019 Q1, 2019 Q2, 2019 Q3, 2019 Q4, 2020 Q1, 2020 Q2

Original Version - Introducing ENNs: A Measure of the Size of Interest Rate Swap Markets

  • This paper proposes Entity-Netted Notionals (ENNs) as a metric of interest rate risk transfer in the interest rate swap (IRS) market. Unlike notional amounts, ENNs normalize for risk and account for bilateral netting of long and short positions.
  • As of March, 2019, IRS notional amount for U.S.-reporting entities is $231 trillion, but ENNs are only $13.9 trillion in 5-year swap equivalents. Measured with ENNs, the size of the IRS market is approximately the same as other large U.S. fixed income markets.
  • This paper quantifies the size and direction of IRS positions across and within business sectors. The extensive netting of IRS longs and shorts is due to relatively few, large entities: over all entities, 92% are either exclusively long or exclusively short, consistent with being prototypical end users.
  • Some sector-specific findings call for additional research. While pension funds and insurance companies are net long, as sectors, presumably to hedge long-term liabilities, approximately 50% of these entities are actually net short.
Lee Baker, Richard Haynes, Bruce Tuckman

Interest Rate ENNs: Futures Addendum

Update: 2019 Q3, 2019 Q4, 2020 Q1, 2020 Q2

  • In 2018, the CFTC introduced entity-netted notionals (ENNs) as a measure of risk transfer in interest rate swaps markets. In this paper, we extend the ENNs concept, for the first time, to futures markets, specifically interest rate futures.
  • Because futures markets are fully cleared markets, much less position netting is required in the ENNs calculation than in the equivalent interest rate swaps market. However, given that the duration of interest rate futures contracts is generally lower than that for swaps (e.g. the very short duration Eurodollar futures contract), there is a much larger difference between the notional and the duration-adjusted notional of futures markets relative to swaps.
  • In aggregate, the total notional size of major interest rate futures positions as of the end of June 2019 is roughly $81tn (compared to $248tn in swaps). This reduces to $1.6tn in futures ENNs equivalents, significantly lower than the size of rate swaps as measured by ENNs - $14.5tn.
Lee Baker, Richard Haynes, Bruce Tuckman

Overview of SOFR-based Activity

Analysis for 2019 Q2, 2019 Q3, 2019 Q4, 2020 Q1

  • This report, planned to be released quarterly, provides a high-level overview of trade activity and holdings for SOFR-based derivatives.  This report parallels a number of other efforts that provide a quantitative view on the Libor transition.  
  • Activity in SOFR-based futures and swaps has generally been increasing quarter-on-quarter.  In some cases, like swaps, this growth can be significant (on the order of hundreds of percent).
  • Though the activity is spread across a number of different participant types, the level of activity is still significantly lower than the equivalent Libor-based markets.  As one example, current open interest in Libor-based swaps stands at almost $100tn; this level is far higher than the just over $100bn in SOFR open interest.
Richard Haynes, Madison Lau, Bruce Tuckman

How Customized are Interest Rate Swaps?

  • Given perceived benefits with respect to trading efficiency, many expected a “futurization” of the interest rate swap (IRS) market after Dodd-Frank essentially leveled the regulatory playing field across futures and swaps.
  • One longtime explanation of why rates trading has not shifted more to futures is that many market participants demand customized terms, which standardized futures cannot provide.
  • This paper does not support the customization hypothesis. Analysis reveals that, depending on the exact definition of “standardized,” between 58% and 78% of IRS notional amount is standardized.
  • While less of the uncleared swap market is standardized, between 32% and 41% of notional amount, uncleared swaps represent only 4% of the notional amount in the data.
David Reiffen, Bruce Tuckman

Systemic Risk and Firm Size: Is Notional Amount a Good Metric?

  • Many post Dodd-Frank financial regulations exempt smaller entities from their coverage.  While these exemptions can be justified on efficiency grounds, the logic depends on size being measured appropriately.
  • Notional amount, which is typically used for derivatives regulations and size thresholds, is a flawed measure of an entity’s contribution to systemic risk.
  • Using Entity-Netted Notionals, a risk-based metric of size, we show empirically that notional amount is only weakly correlated with risk for entities that are soon to be required to come into compliance with the uncleared margin rule.
Lee Baker, Richard Haynes, Madison Lau, John S. Roberts, Rajiv Sharma, Bruce Tuckman

ENNs for Corporate and Sovereign CDS and FX Swaps

CDS update as of 2018 Q4, FX update as of 2018 Q4, CDS update as of 2019 Q1, FX update as of 2019 Q1, FX update as of 2019 Q2, CDS update as of 2019 Q2, FX update as of 2019 Q3, CDS update as of 2019 Q3, FX update as of 2019 Q4, CDS update as of 2019 Q4, FX update as of 2020 Q1

  • This white paper makes use of CDS and FX swap position data to calculate entity-netted notional (ENNs) equivalents for the two new asset classes. The report, like the earlier one on IRS positions, translates swap notional values into risk-based measures more easily comparable to other financial markets like corporate bonds.
  • After risk-adjusting CDS markets against a 5-year CDS benchmark contract and allowing for counterparty netting, the $5.5tn notional market falls to a $2.0tn risk-adjusted equivalent. After a similar netting exercise in FX markets, the authors calculate a reduction from $57tn of swap notional to a significantly lower $17tn ENNs level.
  • Using these risk-adjustments, the size of all three markets (IRS, FX, and CDS) falls to levels comparable to that of markets like corporate bonds ($13tn) and U.S. Treasuries ($17tn).