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, 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.
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.
Raymond P. H. Fishe, Richard Haynes, Esen Onur

Resiliency in the E-mini Futures Market

Journal of Futures Markets, Volume 42, pp.5-23, January 2022.

  • We measure how quickly market participants enter an order into the limit order book after their existing order was executed or cancelled
  • We find that traders take longer to place a new market order compared to a new limit order
  • We also find that market participants are quicker to place a new order if there are more executions taking place in the market, if there are more new orders being placed on the limit order book; but market participants are slower to place a new order if there are more cancellations happening on the limit order book.
Esen Onur, John S. Roberts, Tugkan Tuzun

Trader Positions and Aggregate Portfolio Demand

Journal of Economic Asymmetries, Volume 27, June 2023.

  • The distribution of minutely position changes by traders explains how prices move from one minute to another.

  • The paper shows that these position changes bring new information into the market especially when they are acquired with passive orders.

  • The paper finds that our results hold in the S&P 500 futures (E-mini) and 10-Year Treasury futures markets.

  • The authors claim that passive limit orders have important impact on prices.

Alexei Orlov, Rajiv Sharma

Which Witch is Which? Deconstructing the FX Markets Activity

  • 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.
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.
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.