Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.


09:45 AM
Connect Directly

ICE Licenses Swap Futures Methodology From Eris Exchange

Intercontinental Exchange plans to begin trading swap futures in 2015 in credit and interest rates based on intellectual property licensed from Eris Exchange. ICE will offer a rival product to cleared OTC swaps.

Intercontinental Exchange struck a licensing agreement with Eris Exchange to list derivatives based upon Eris’s patent-pending methodology for constructing swap futures.

Under the deal, ICE has the right to list European and U.S. credit default index and European interest rate swap futures based on the Eris methodology.

Starting in 2015, ICE has plans to launch swap futures on the European and U.S. credit default swap (CDS) markets based on the Markit CDX and iTraxx indices. In addition ICE plans to launch interest-rate swap futures denominated in euro- and pound-sterling based on the Eris product design.

“It’s further validation that the market believes our contract design is the leading alternative to cleared swaps,” says Neal Brady, CEO of Eris Exchange in an interview.

The deal with ICE follows in the same path as one signed with TMX Group’s Montreal Exchange which licensed its contract design for Canadian dollar interest-rate swap futures, says Brady.  

For more information on the deal with TMX Group's Montreal Exchange, read "Eris Swap Futures Expand into Other Regions & Asset Classes."

“It shows that the product design and methodology is applicable to other geographies and to other asset classes. It really starts to establish us as a global benchmark and as the clear alternative to cleared swaps trading,” says Brady.

Also, since this is the futures market, the deal with ICE is significant in that it opens the swap futures market to a larger marketplace that doesn’t have access to cleared swaps, says Brady. For example, it opens the market to medium size trading firms, individual proprietary traders and people who can stream prices to the Eris platform but would never do that in the swaps market, according to Brady.

The deal also positions ICE to compete with rivals in Europe -- Deutsche Borse and CME in Europe -- that have begun to launch hybrid fixed-income swap futures products, reports the Financial Times.

The rationale behind swap futures is that they are more capital efficient than cleared swaps, with lower margin collateral costs that fit into the futures regulatory and operational framework.

By licensing the intellectual property of Eris, ICE customers will gain access to the European and U.S. CDS markets and European interest-rates markets “through a regulated futures contract that can be cross-margined with ICE’s broad fixed income offering,” according to a statement by ICE’s Chief Strategy Officer David Goone, in the release.

Swap futures are alternatives to OTC cleared swaps that are required to trade on swap execution facilities known as SEFs. “It’s really not everybody that can join a SEF or be given access to a SEF. The price of trading OTC swaps are increasing by the day," says Brady, who adds, more people who have open positions in OTC swaps are getting priced out of the market.

As part of the multi-year licensing agreement, all ICE swap futures products based on the ERIS methodology will be traded via the ICE trading platform and they will be cleared through the ICE clearing houses. Anyone with a futures account that has clearing set up with ICE’s clearing houses can trade the new ICE CDS futures contracts with Eris methodology backed into the design, according to an Eris spokesman. [There is no change to a prior clearing arrangement with CME for U.S. dollar interest rate swap futures where Eris lists products on its own platform and clears through CME.]

“That’s one of the reasons that ICE is the right partner for us with CDS. They have the vast majority of the OTC cleared CDS market, and they are the only futures exchange that has the right to list futures contracts on the leading CDS indexes,” says Brady.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

Register for Wall Street & Technology Newsletters
Exclusive: Inside the GETCO Execution Services Trading Floor
Exclusive: Inside the GETCO Execution Services Trading Floor
Advanced Trading takes you on an exclusive tour of the New York trading floor of GETCO Execution Services, the solutions arm of GETCO.