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
John Coughlan, Madison Lau, Alexei Orlov

Single-Name and Index CDS Dynamics during the Market Stress of 2020

•    Using regulatory and nonregulatory data, the paper studies the dynamics of single-name and index CDS leading up to, during, and in the aftermath of the market turmoil of March 2020.
•    The paper reports volume and directionality of trades and positions of major market participants detailed by product and firm type.
•    Gross notional in the standard CDS indices nearly doubled by mid-March 2020, while non-standard indices and single-name CDS remained largely at the pre-COVID levels.
•    Hedge funds and asset managers were the most active client sectors in absolute terms; insurance companies and pension funds showed significant relative movements.
•    CDS volume traded during the COVID period increased more in relative terms than the volume of either interest rate swaps or currency swaps.
•    US and European investment-grade indices were the most heavily traded indices during the market stress of 2020.
•    Swap dealers more than doubled their standard index positions in March 2020, accounting for more than 85% of the total increase across all market participants.

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, 2020 Q3, 2020 Q4, 2021 Q1, 2021 Q2, 2021 Q3, 2021 Q4, 2022 Q1, 2022 Q2, 2022 Q3

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

Financial Markets, Institutions & Instruments Volume 30, Issue 1, February 2021, Pages 3-28

  • 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.
John Coughlan, Alexei Orlov

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

•    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.

Christopher Burns, Stephen Kane

Arbitrage breakdown in WTI crude oil futures: An analysis of the events on April 20, 2020

Resources Policy, Volume 76, 2022

  • On April 20, 2020, during the May 2020 NYMEX WTI futures contract (CL) settled to a negative price for the first time in history
  • On the same day, prices for the CL and e-mini (QM) WTI contracts decoupled
  • The distribution of arbitrageurs in the market was significant different on April 20, 2020 when compared to all other spot periods from 2011-2020
  • Supply constraints at the Cushing, OK delivery point contributed to the price anomalies and volatility observed around this event
Alex Ferko, Amani Moin, Esen Onur, Michael Penick

Who Trades Bitcoin Futures and Why?

  • We analyze the traders active in the Bitcoin futures (BTC) contracts traded on the Chicago Mercantile Exchange (CME)
  • There are two primary trader types, those who hold almost exclusively BTC (concentrated traders) and those who hold BTC to diversify a broader futures portfolio (diversified traders). 
  • The prevalence of concentrated vs diversified traders changes over time. 
  • Diversified traders connect BTC markets to other futures markets through common holdings.
  • Trader composition in the micro contract is different than that of the full-size contract.
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 the literature on systemic risk provides efficiency justifications for certain exemptions, the efficiency rationale depends on measuring size appropriately.
  • We argue that notional amount, the metric used in derivatives regulations such as the unclear margin rule, is a flawed measure of an entity’s contribution to systemic risk.
  • We show that Entity-Netted Notionals (ENNs), a risk-based metric of size, better corresponds to size in the context of the literature modeling of a firm’s contribution to systemic risk.
  • Using regulatory data, we provide empirical insight into how well notional amount corresponds to this more theoretically-oriented measure. We find the relationship between the metrics is fairly weak for entities for whom the size-based exemption will soon be ending, and provide an empirical basis for understanding why they differ.
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

  • 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

  • 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.