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
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 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.
Richard Haynes, Madison Lau, Bruce Tuckman

Initial Margin Phase 5

  • The paper analyzes regulatory data collected on open uncleared swap positions to identify entities which may be caught under uncleared swap margin requirements.
  • This analysis finds that the final phase of the uncleared swap rules may catch a far higher number of entities than the other four phases combined:  over 700 entities, representing nearly 7,000 counterparty relationships.  A majority of these entities have swap exposures quite close to the Phase 5 lower threshold.
  • Entities potentially caught in Phase 5 span a variety of business sectors; excluding one swap type commonly used for hedging (physically settled FX swaps), could reduce the number of entities by almost 30%.
Richard Haynes, John Roberts, Rajiv Sharma, Bruce Tuckman

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

Updates: 2018 Q1, 2018 Q2, 2018 Q3

  • The paper argues that notional amount, a commonly used measure of the size of derivatives markets, does not accurately represent the amount of risk transfer in interest rate swap markets.  The paper then introduces a novel metric, Entity-Netted Notionals (ENNs), as a superior measure of market size.

  • ENNs are the sum of all net long (or short) swaps exposures, expressed in 5-year equivalents, where netting is calculated within each counterparty pair and currency.

  • As measured by ENNs, the U.S. regulated Interest Rate Swaps market is approximately $17 trillion in size, significantly lower than the notional amount of $224 trillion. This $17 trillion exposure is comparable in size to many other fixed income markets, like corporate bonds at $12 trillion or U.S. Treasuries at $16 trillion.

Richard Haynes,, Lihong McPhail, Haoxiang Zhu

Assessing the Impact of the Basel III Leverage Ratio on the Competitive Landscape of US Derivatives Markets: Evidence from Options

  • Market participants argue that the recent leverage ratio has become the binding constraint for certain, often low-risk derivatives businesses, such as client clearing.
  • We examine the potential effect of the Basel III leverage ratio on cleared equity futures options, products where the leverage ratio demands particularly high capital relative to risk.
  • We find that the clearing of equity options has shifted from firms subject to higher leverage requirements (e.g., US GSIB banks) to those subject to a lower requirement (e.g., banking affiliate of EU firms and non-banks).
  • We find that the shift in market shares is most evident in low-delta options, which have relatively small risk for a given notional amount, and is absent in US Treasury futures options, which are subject to a lower requirement.
Michael Roberson

Cleared and Uncleared Margin Comparison for Interest Rate Swaps

  • The paper compares cleared margin to hypothetical uncleared margin generated by ISDA SIMM on interest rate swap portfolios currently cleared at two DCOs. First the market risk measure is examined, and then the overall initial margin figure with add-on charges included.
  • The ten-day value-at-risk as calculated by SIMM is not necessarily higher than the five-day DCO measure. The relative measures are dependent on portfolio composition, which in turn points to key model assumptions.
  • Once non-market charges are included, the cleared initial margin requirements are much closer to the equivalent uncleared figures. This may be explained by a difference in the treatment of liquidity and concentration risk across the two models. The SIMM framework extends the holding period to account for large-position liquidation risk, whereas the DCO models calculate simultaneous market and liquidity costs throughout the five-day period.
Richard Haynes, Lihong McPhail

The Liquidity of Credit Default Index Swap Networks

  • The paper analyzes the effect of transaction networks on the liquidity of credit index swaps.

  • It finds that transaction costs fall in cases when customers trade with a larger number of dealers and when they trade with the most active dealers.

  • The paper also summarizes a few other recent credit index trends, including possible liquidity improvement like daily volume increases and reduced price impacts.  In possible contrast we do see slight trade size decreases for some contracts.

Stephen Kane

Exploring price impact liquidity for December 2016 NYMEX energy contracts

  • Examines the liquidity of the December 2016 NYMEX contracts for crude oil, natural gas, diesel, and gasoline.

  • Finds that there is excellent liquidity near expiration as well as good liquidity when there are multiple years until expiration that is improved by the trading of calendar spreads.

  • Recommends a new liquidity assessment tool that may be used to calculate initial margin for large positions or by traders wanting to establish or remove a large position.

Agostino Capponi, W. Allen Cheng, Stefano Giglio, Richard Haynes

The Collateral Rule: An Empirical Analysis of the CDS Market

  • The paper tests whether initial margin held at a clearinghouse against credit swap positions can be estimated using a traditional VaR measure.

  • This analysis finds that VaR is often not a good proxy for actual initial margin levels, with collected margin often far higher than would be implied by the VaR calculation. Other proxies which more highly weight extreme events are found to better align with empirical margin.

  • The paper also tests how certain financial frictions, like funding costs and market-level volatility, translate into changes in margin requirements.

Vikas Raman, Michel A. Robe, Pradeep K. Yadav

The Third Dimension of Financialization: Electronification, Intraday Institutional Trading, and Commodity Market Quality

  • Provides the first detailed empirical evidence on the financialization of intraday trading activity in WTI futures.

  • Shows that electronification of U.S. crude oil futures trading in 2006 brought about a massive growth in intraday activity by “non-commercial” institutional financial traders.

  • Shows that this development had a first-order positive impact on market liquidity (spreads, depth) and pricing efficiency.

  • Finds notable differences between contributions of high-frequency traders (HFTs) vs. other (non-HFT) institutional financial traders to different market quality attributes.

Lynn Riggs, Esen Onur, David Reiffen, Haoxiang Zhu

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

  • 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.