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GMEX’s CMF: A Novel Interest Rate Product

It’s been just over one week since Global Markets Exchange (GMEX) debuted. Connectivity was available at launch through X_TRADER®, and in fact the first trade on GMEX was executed between two X_TRADER users. We’re planning to offer access through the next-generation TT platform later this year.

GMEX has launched Euro-denominated IRS constant maturity futures (CMF) in response to demand from end users. These demands arose from changes in the European derivatives markets that were introduced under the European Markets and Infrastructure Regulation (EMIR) and the European Commission’s review of the MiFID II. These futures, positioned as alternatives to OTC interest rate swaps, allow end users to benefit from the capital and margin efficiencies of futures, which are more favorable than the higher margin requirements for cleared swaps.

Why trade GMEX’s constant maturity future?

The CMF is not a futurized swap; it is a futures contract based on a swap index, the constant maturity index (CMI). The CMI is designed to replicate daily changes in the plain vanilla interest rate swap market. As interest rates vary, the index will track these changes and replicate the IRS’s valuation changes for end users.

GMEX refers to these futures as IRS constant maturity futures, and as the name suggests, these futures have no expiry. A trader can open a position in a CMF contract and hold it in perpetuity. It will not expire, and there is no need to roll positions every quarter in order to maintain the exposure. Many market participants seek to always be “in” a target maturity along the yield curve. Historically, these participants have been frustrated by the high cost of rolling contracts or securities to maintain their position at a given maturity point. The CMF contract goes a long way toward mitigating these costs.

 

GMEX contracts trade on a central limit order book and are centrally cleared at Eurex Clearing. Since they are cleared at Eurex, the GMEX contracts in the future are likely to have margin offsets with the Bund, Bobl, Schatz and Eurex OTC products.

The CMF’s launch is well timed to capitalize on the dynamic regulatory environment. In addition, its inherent efficiencies and novel design can attract interest from new and existing IRS market participants. These new products give traders who might not otherwise have access to the swaps markets the ability to speculate on the outright or spread them against another yield-based product. CMFs provide interest rate exposure to all of Europe as a trader can spread German interest rate products against CMFs to take a view on German interest rates versus broader European interest rates.

GMEX contracts clear through Eurex Clearing alongside Eurex Bund, Bobl, Schatz and OTC
products, making it easy to spread German interest rate products against GMEX CMFs using Autospreader.

Using X_TRADER’s unique functions, hedgers and speculators will be able to see and trade the CMFs in yield vs. the yield of the Eurex Schatz, Bobl, Bund and Ultra contracts. Using Autospreader®, a trader can configure a synthetic spread between the Eurex Bobl and the 5-year CMF and automatically quote both instruments to achieve a desired spread price or yield differential.

A future release of X_TRADER will display the present value (PV) associated with the GMEX trades in the X_TRADER Orders and Fills Window, and it will use the PV value for P&L calculations. Stay tuned for more, or contact us if you’re interested in talking with us today about how you can access GMEX.

Posted by: Sanju Varghese, Product Manager

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