Simplifying bank and credit union access to FASB-eligible hedges
Higher interest rates and deposit instability highlight the importance of duration hedging. Eris SOFR Swap futures (Eris SOFR) provide banks and national credit unions (NCUs) the simplicity of CME Group exchange-listed futures to hedge exposures to interest rate volatility replacing cumbersome OTC interest rate swaps.
Exchange-listed futures: Transparent, low-cost alternative to OTC swaps
Hedgers use Eris SOFR as a preferred alternative to OTC interest rate swaps. As futures contracts listed by CME Group, Eris SOFR offers market participants the economic performance of a standard, fixed-versus-floating rate interest rate swap and the advantages of using U.S. futures:
- Straightforward futures paperwork: No ISDA agreements with dealer counterparties
Trade using a traditional futures account and broker, the same workflow one would use to trade CME Treasury futures or three-month SOFR Strip futures.
- Traditional pricing and operational simplicity: Reduce expensive overhead and risk management
View independent and transparent prices provided by CME Group, simplify settlement, cash processing, and obtain daily valuation and risk parameters in one easy solution. Execute electronically or via blocks to further refine hedges.
- Capital-efficient futures margin: Post up to 65% less than cleared swap or uncleared margin
Save significant capital by reducing the amount of initial margin posted to collateralize positions.
- Eligible for FASB hedge accounting (FAS-133/ASC-815)
Like interest rate swaps, banks and NCUs may use Eris SOFR Swap futures to reduce income statement volatility by applying fair value or cash flow hedge accounting.
Hedging example: Advantages of Eris SOFR
Use case: Bank enters into a $100 million, five-year swaps/futures position (paying fixed, receiving floating) to reduce the duration of its Available for Sale securities.
|Issue||Hedge: Eris SOFR Swap futures||Hedge: OTC Interest Rate Swaps|
|Documentation and Timing||One 5-10 page futures agreement with broker (can be agreed upon in less than one week)||Extensive ISDA agreements with each bilateral counterparty (up to six months negotiation)|
|Trading Counterparties||No counterparty docs; trade with any futures market participant on entry/exit||Trade only with ISDA-signed dealers; must exit trade with dealer used to enter|
|Cost||Fully disclosed exchange, clearing and brokerage fees; pay initial margin 60% less than cleared swap||Fees embedded in price of the trade, marketed as “free”; cleared swap margin more than two times higher than Eris SOFR|
|Valuation||Includes daily, independent marks distributed publicly by CME Clearing||Often requires costly third-party valuation service|
|FASB Hedge Accounting||Eligible for hedge accounting treatment, based on hedge-specific circumstances||Eligible for hedge accounting treatment, based on hedge-specific circumstances|
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.