The U.S. corporate bond market is approximately $10.9T in size as of 1Q 2024,[1] according to SIFMA. Given the size of this market, index-linked products are popular among participants who desire to express various views on the credit market.

CME Group Bloomberg Credit futures offer market participants an exchange-traded futures contract based on market-leading credit indices provided by Bloomberg. To assist market participants with navigating the various index-linked products available in the marketplace, this paper compares key attributes of the Bloomberg Credit futures with corporate bond exchange-traded funds (ETFs) and credit default swap (CDS) indices.

Figure 1: Summary of Credit product comparison

Attribute

Credit futures

Credit ETFs

CDS Indices

Underlying Market

Large, comprehensive indices

Basket of representative bonds

Selected CDS of specific bonds

Return

Total return and spread

Total

Spread only

Trading Venue

Exchange Traded Derivative

Exchanged Traded Security

OTC Derivative

Leverage

Yes – <2% of notional contract value

Yes, but Regulation T limit is 50% 

Yes – leverage is typically used

Margin Offsets with Rates Derivatives

Yes

Not typically

Not typically

Balance Sheet Exposure

Off balance sheet item

A security (so, not off balance sheet item)

Off balance sheet item

Ease of Access

No ISDA agreement required

No ISDA agreement required

ISDA agreement is required

Management Fees 

None

Yes

None

Underlying Market

  • Bloomberg Credit futures

Bloomberg Credit futures are based on comprehensive indices that offer market participants exposure to large segments of the U.S. corporate bond market. For instance, as of February 2024, the Bloomberg U.S. Corporate Investment Grade index had nearly 8,000 constituents representing approximately $6,600B in market value, and the Bloomberg U.S. Corporate Very Liquid High Yield index had nearly 1100 constituents representing approximately $900B in market value.[2] Bloomberg Credit futures are designed to be priced closely in line with the value of their underlying indices and are therefore highly representative of their respective markets.

  • Credit ETFs

Credit ETFs come in many different forms. Market participants – often institutional and individual investors – can find credit ETFs that are designed to track very large markets, such as investment grade corporate bonds, or more unique ones that focus on highly specific subsectors. However, regardless of any ETF’s underlying benchmark, all ETFs have an element of tracking error built in. This is because ETF managers must select a basket of securities that they believe is representative of the market they intend to track to hold in the ETF. This necessarily creates a tracking error between the ETF performance and the underlying market.

  • CDS indices

CDS indices package credit default swaps on various corporate bonds into a tradable instrument. CDS indices are offered in different credit quality and sectors, and typically include a few dozen to 125 distinct entities that are equally weighted in the index. CDS are over-the-counter (OTC) derivatives that allow credit risk to be transferred between parties. A payout is triggered when a credit event (such as bankruptcy or failure to pay) occurs on an underlying bond issue. CDS indices are therefore highly specific and idiosyncratic – their price depends on whether a credit event occurs or is likely to occur amongst a basket of a relatively few amount of corporate bonds.

Return Profile

  • Bloomberg Credit futures

Bloomberg Credit futures come in three varieties: Investment Grade (Globex code: IQB), Very Liquid High Yield (Globex code: HYB) and Investment Grade Duration Hedged (Globex code: DHB). The first two – IQB and HYB – offer total return (credit and interest rate risk) exposure for both the investment grade and high yield corporate bond market. The latter futures contract – DHB – offers the only the credit spread component of the investment grade index. In addition, inter-commodity spread trading functionality is enabled between IQB and the CME Group 10-Year U.S. Treasury Note futures contract.

  • Credit ETFs

While duration hedged credit ETFs are available in the marketplace, most credit ETFs are total return oriented.

  • CDS indices

CDS indices offer only the credit risk component of their underlying instruments. As discussed above, payouts for their underlying derivatives are triggered only when a credit event occurs.

Trading venue: Leverage, margin offsets, balance sheet exposure and ease of access

  • Bloomberg Credit futures
    Bloomberg Credit futures are exchanged-traded derivatives. As a result:


    • Leverage, in the form of initial margin required to trade these products, is abundant (i.e., initial margin is low). Only about 0.65% (DHB), 1.3% (IQB), and 1.5% (HYB) of the contract notional value must be posted as initial margin.
    • Margin offsets are offered between Credit futures and other correlated products. For instance, margin credits of 75% between IQB and 10-Year U.S. Treasury Note futures, 65% between HYB and E-mini S&P 500 futures, and 65% between IQB and E-mini S&P 500 futures are available at the Exchange.[3]
    • Balance sheet impact is low because derivatives are considered off-balance sheet items for depository institutions.[4]
    • Ease of access is high – no ISDA Master Agreement is required to trade exchange-traded derivatives.

  • Credit ETFs
    Credit ETFs are exchange traded products but are not derivatives. As a result:

    • Leverage is limited due to the Federal Reserve Board’s Regulation T, which limits the amount of initial margin that securities brokers and dealers may extend to 50% of the security’s purchase price.[5]
    • Margin offsets are not typically offered with rates derivatives.
    • Balance sheet impact is significant because ETFs are securities not derivatives, so they are not considered off-balance sheet items.
    • Ease of access is high – no ISDA Master Agreement is required to trade ETFs.

 

  • CDS indices
    CDS indices are OTC derivatives. As a result:

    • Leverage is typically used in CDS index trading. 
    • Margin offsets are not typically offered on OTC derivatives. 
    • Balance sheet impact is low because derivatives are considered off-balance sheet for depository institutions.
    • Ease of access is low – ISDA Master Agreement is required to trade OTC derivatives. 

Management fees

  • Bloomberg Credit futures

There are no management fees for CME Group futures. Market participants only incur a transaction fee when actively trading a futures contract.

  • Credit ETFs

ETFs charge a management fee for as long as an asset is held by a customer, regardless of trading activity.

  • CDS indices

There are no management fees for OTC derivatives.

References

[1] See SIFMA “US Corporate Bond Statistics
[2] Source is Bloomberg US Corporate Investment Grade Index and Bloomberg US Corporate Very Liquid High Yield constituent data from Bloomberg as of February 29, 2024
[3] See CME Clearing Notice 24-168 for additional margin details
[4] See Federal Reserve Board guidance on off-balance sheet items
[5] See Federal Reserve Board list of regulations


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.

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