Credit Futures: What We’re Hearing from Clients
04 Oct 2024
Feedback from the buy-side
- Hedge effectiveness: Client feedback has centered around the hedge effectiveness of directly referencing the corporate bond indices, reducing tracking error risk relative to other credit index derivatives. This also complements the fixed income ETF market by providing a capital efficient method that is market-value weighted across all sectors, including financials.
- Early adopters: Several clients have already adopted the product during the early stages of open interest development. These include large asset managers (some with trillions of AUM) as well as mid-size firms across the U.S. and Europe. There are dozens more in the pipeline that plan to start trading in Q4.
- Cash-settled: Early adoption is possible as the product is cash-settled, mitigating risk of getting “stuck” with a position, and it’s possible to manage risk with other Macro Credit products in cash and OTC derivatives.
Feedback from the sell-side
- Block liquidity is available: Multiple dealers have begun providing their clients liquidity directly via block trades ($10M notional minimum). These firms encourage you to reach out and learn about the typical liquidity available as an alternative to trading electronically on the central limit order book.
- Dealers also use it to hedge: In addition, several dealers have also started trading electronically to manage their own risk across Macro Credit products, for example, to offset flows in Portfolio Trading or Total Return Swaps.
- Basis Trade at Index Close (BTIC) is now available based on requests from brokers. This allows you to trade against the forward index value (calculated as of 4:00 p.m. ET daily by Bloomberg).
- Derived blocks – CME Group continues to hear interest in trading Credit futures using derived blocks, a method for liquidity providers to build in the delta hedge into the execution price. Stay tuned for more updates on that in the near future.
Data-based observations from CME Group
- Duration-Hedged IG futures (DHB) has been the most popular contract thus far (based on ADV). Clients have praised the innovative approach to risk management, which embeds short Treasury futures positions in the index price so that the contract represents only excess return.
- Demand for risk metrics: Several clients have asked about seeing metrics like DV01 and CR01, and while they are not yet available on the Bloomberg terminal, we have provided a framework for calculating these in an FAQ.
- Liquidity is tight, generally 0.05% of index price, with average size shown at the top of the order book at least $2M notional.*
- First roll was smooth: The products just completed their first cycle (expiration is quarterly on IMM dates). Trading took place on-screen and in blocks, and the majority of open interest moved to the back-month (Dec-24). All active participants expressed this roll went well from their view.
Learn more about Credit futures:
- Webinar: Credit futures hedging examples
- Market Maker directory
- Credit futures in credit portfolio risk management
*Source: CME Group
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
