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Eurodollar Cross Margining Efficiencies

Utilizing the CME Group proprietary SPAN margin system, cross margining allows gains accruing to futures or options positions within an asset class to be immediately available to meet the margin requirements of futures or options positions that have sustained losses. This reduces your capital requirements while freeing up more of your funds to pursue additional profit opportunities.

To the right is an example of how cross margining with Eurodollars can reduce your capital requirements.

Eurodollar Futures vs. 2-Year Treasury Futures (3:2) - 60% Spread Credit
Outright rates:
2-Year Note Futures: $500
Eurodollar Futures (2nd Year Red): $550
 
Spread credit: 60 percent

Margin before spread credit: $550 x 3 + $500 x 2 = $2,650

Margin after spread credit: $2,650 X 0.4 = $1,060 for a savings of $1,590

 

Liquidity during Market Uncertainty

On Friday, August 5, Standard & Poor's downgraded the credit rating on U.S. sovereign debt. The ensuing whirlwind of market volatility reinforced the need for deep liquidity that allows for the quick decisive action necessary to manage risk in an uncertain environment. CME Group's Eurodollar Futures and Options once again delivered that liquidity.

On August 5, our Eurodollar volume exceeded 5.3 million contracts (notional value of $5.3 trillion). The next few business days registered Eurodollar volumes of 5.1 million, 6.3 million, 7.8 million, and 6.5 million - an average daily volume (ADV) of 6.4 million (notional value of $6.4 trillion). By comparison, Eurodollar ADV through the first seven months of 2011 was approximately 3.3 million. Since August 1, Eurodollar open interest (OI) has grown by an average of 133,238 contracts per day, and currently stands at nearly 33 million contracts (notional value of $33 trillion). It's clear that during times of duress, market participants choose CME Group Interest Rate products, the proven industry benchmark for managing short-term interest rate exposure.

 

Market Depth That Delivers

The CFTC's "Traders in Financial Futures Report," which defines large open interest holders in Eurodollar futures as having at least 3,000 open contracts, reported that our 3-Month Eurodollar futures had 220 large open interest holders at the end of Q4 2010. Through the first seven months of 2011, that number has grown 28 percent to 282 large open interest holders. By comparison, only one U.S. financial futures contract has more large open interest holders - our own E-mini S&P 500 contract (515).

To read our latest whitepaper "Eurodollars as Risk Management Tools" click here

What's more, the CFTC requires that a futures contract have at least 20 large open interest holders to be significant enough to include in the report - and our Eurodollar futures contract was theonly exchange-traded Eurodollar contract to be included. The chart to the right illustrates the continuing growth trend that started in mid-2008.

 

Liquidity When You Need It

When the July 8 unemployment numbers were released, our eurodollar volume was
32,460 within the first 10 seconds after market open. By the time the markets closed later that day, our eurodollar volume had exceeded 4.3 million ($4.3 trillion in notional value). When your ability to get in and out of a market with ease is imperative to your strategy, can you rely on anyone else to provide the liquidity you need, when you need it most?

To read our latest whitepaper "Eurodollars as Risk Management Tools", click here

The Eurodollar futures contract is the most widely traded and versatile interest rate futures product in the world. It provides a valuable, cost-effective tool for hedging interest rate fluctuations on Eurodollars – U.S. dollars deposited in commercial banks outside the United States. Eurodollar deposits play a major role in the international capital market, and have long served as a benchmark interest rate for corporate funding.

Eurodollar futures provide a way to:

  • Hedge short term interest rate risk
  • Execute a variety of trading strategies, such as Butterflies, Packs and Bundles
  • Express a view on the direction of interest rates

Things to know:

  • Eurodollar futures reflect the London Interbank Offered Rate (LIBOR) for a 3-month, $1 million offshore deposit maturing at some point in the future
  • More than 85% of Eurodollar futures now trade electronically on the CME Globex platform
    • Available virtually around the clock, around the world
    • Complete price transparency and anonymity
    • Market prices universally available in real time
  • Product also trades side-by-side on the CME Group trading floor during open outcry trading hours
  • CME Clearing clears and settles all trades and guarantees counterparty creditworthiness
  • Flexibility
  • Concentrated liquidity
    • Consistently tight bid/ask spreads and lower transaction costs
  • Price transparency
    • Open, fair and anonymous trading environment
    • Market prices universally available in real-time
  • Variety of trading opportunities, including:
    • Outright long or short positions
    • Spreading against other instruments
    • Hedging and arbitrage strategies
  • Ease of trading
    • Electronic trading on CME Globex provides
      • Reduced connectivity costs
      • Increased accessibility
      • Fast, efficient trading
  • Implied electronic spread functionality
    • 3-, 6-, 9-, 12-, 15- and 18-month Calendar spreads are implied along the entire length of the Eurodollar futures curve
    • 3-, 6- and 12-month Butterfly spreads are implied along the entire length of the Eurodollar futures curve
    • Pack Spreads implied through the first Orange contract 

More about Eurodollars

  • Eurodollar deposits are direct obligations of the commercial banks accepting the deposits
    • They are not guaranteed by a government entity
    • Although they represent low-risk investments, Eurodollar deposits are not risk-free
  • Eurodollar futures and options lead the industry with open interest exceeding 40 million and average daily volume of 3.0 million [update with end 07 data]
  • Through December 2007, Eurodollar futures and options on futures set a record pace, trading over 500 [update with end ‘07 data] million contracts
  • Since CME launched Eurodollar futures in 1981:
    • They have evolved into one of the world's most innovative and popular contracts
    • They are now the most actively traded futures contract in the world, with open interest recently surpassing the X million mark
    • Due to their exceptional adaptability and versatility, they continue to evolve due to nonstop enhancements
    • They now offer even more trading opportunities than when they were first launched
 
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