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
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, 2018 Q4, 2019 Q1

  • 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.

Lee Baker, Richard Haynes, Madison Lau, John 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

  • 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).
Richard Haynes, John S. Roberts

Automated Trading in Futures Markets — Update #2

Prior Versions: March 2017, March 2015

  • The paper analyzes the prevalence of automation across futures markets, tracking changes over the period from 2012 through 2018.
  • Automation use is highest for financially based instruments like FX futures, the S&P E-mini and U.S. Treasury contracts. Automation levels are commonly lower, though increasing, for physical commodities like grains, softs and livestock.
  • Though most markets have gotten faster over time, with order resting times and execution times decreasing across the six year period, the rate of change appears to have flattened in recent years.
Michel A. Robe, John S. Roberts

Who Participates in Agricultural Futures Markets – And How?

  • There is a market core. Of the almost 4,000 reported grain and oilseed futures traders in 2015-2018, the top 25% most persistent traders account for around 80% of the open interest. Just under 200 persistent traders make up 40% of the open interest.
  • Granularity matters. Of nine trader categories, just three (managed money traders and commercial dealers/merchants, plus commodity index traders on the long side) account for about four fifths of all large trader positions. Managed money (non-commercial) and dealer/merchant (commercial) positions are strongly negatively correlated.
  • Traders overwhelmingly hold positions in contracts maturing in less than a year. The short-term focus is especially strong for non-commercial traders.
  • Calendar spreads account for one third of the reported open interest. Commercial traders who are not swap dealers (commercial dealers/merchants, mostly) make up from a quarter to two fifths of all calendar spread positions. Much of the intra-year variation in the total futures open interest can be tied to changes in calendar spreading.
Scott Mixon, Tugkan Tuzun

Price Pressure and Price Discovery in the Term Structure of Interest Rates

  • Dealers use Treasury futures to risk manage their inventory of Treasury cash positions.
  • We conclude that there is a “price pressure” effect in Treasury yields: market yields adjust to compensate dealers for holding net inventory.
  • Order flow and price discovery: the back end of the curve is most impacted by 10-year futures, and the front end is most impacted by the 5-year cash market.
Eleni Gousgounis, Esen Onur

Is Pit Closure Costly for Livestock Customers?

  • This paper evaluates the changes in the execution quality of customer orders in the livestock futures market between 2014 and 2016.
  • The focus of the study is to analyze whether liquidity has changed especially for customer orders after the futures pits closed.
  • We find that customers placing aggressive orders in the livestock market face higher execution costs after the pits closed while those customer who were active at the pit prior to its closure, subsequently face higher execution costs in the electronic market.
Richard Haynes, Esen Onur

Effect of Matching Algorithm Changes

  • For a couple of days in May of 2015, the matching algorithm of the 2-year Treasury Futures contract unexpectedly switched from pro-rata to price-time priority.
  • This unexpected change caused average trade sizes to increase, number of transactions to decrease, and fill ratios of passive orders to increase in the 2-year Treasury Futures market for those two days.
  • In addition to the changes to the market statistics, we also find that one measure of price efficiency dropped and revenue distribution became more concentrated as a result of the unexpected change in the matching algorithm.
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,, 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.