Eris Swap Futures at CME Group: Sample Use Cases

In December of 2018 Eris Swap futures became CME Group contracts, listed on CBOT, and available for trading on CME Globex. 

Eris Swap Futures are an alternative to cleared Over The Counter (OTC) swaps

  • Eris contracts replicate the cash flows, risk profile and convexity of the equivalent OTC swap
  • Eris contracts are not physically delivered and may receive the same favorable collateral segregation treatment as OTC swaps for ‘40 Act funds
  • Contracts are IRS section 1256 (a) mark to market contracts facing beneficial 60/40 tax treatment, but may also be exempted to receive the same accrual treatment as OTC swaps

As listed futures contracts, Eris contracts also offer the benefits of listed futures

  • 40-60% maintenance margin savings vs OTC swaps
  • Anonymous, transparent order book liquidity
  • Easy portfolio margin offsets vs other CME Group interest rate futures
  • Simple futures product with lower clearing costs & streamlined documentation
Eris Trading Use Case Goal Sample Trade Construction (weightings omitted) Notes
Swap Spreads Position for widening (or narrowing) of swap rates vs UST yields Spread widener: sell Eris 7y, buy CBOT 10y Note Future (or Cash UST) Margin offsets at CME. Well suited for algo execution
Curve Trades: Steepeners / Flatteners Establish positions to profit from steepening or flattening of yield curve 5s10s steepener: buy Eris 5y, sell Eris 10y Margin offsets, low block thresholds for multi-leg trades
Curve Trades: Butterflies Position for a change in the relationship between 3 points on the yield curve Receive belly of 2s-5s-10s butterfly: buy Eris 5y, Sell Eris 2y & 10y Margin offsets, low block thresholds for multi-leg trades
Trade Mortgage Basis Benefit from widening or narrowing of MBS yields vs swaps Buy MBS basis: Sell Eris 10y, buy TBA MBS May also be used to hedge MBS or mortgage portfolio key rate durations
Hedging Debt Issuance Synthetically convert fixed rate debt to floating rate Swap fixed to floating: buy Eris 10y vs 10y fixed rate debt issuance May also be used for pre-issuance rate lock hedging or hedging a corporate bond portfolio
Convexity Trade Benefit from increasing sensitivity of swaps vs futures as rates fall Long convexity: buy Eris 4y, sell 4y CME Eurodollar futures strip Margin offsets at CME

Trading US Treasury/Swap Spreads with Eris

  • Spread WIDENER: Buy CBOT US Treasury Futures, sell similar tenor Eris Swap Futures
  • Spread TIGHTENER: Sell CBOT US Treasury Futures, buy similar tenor Eris Swap Futures

Swap spread exposure may be efficiently traded with CBOT US Treasury futures and Eris Swap Futures

Weighting an Eris Spread Tightener: Bloomberg FIHR

  • Using FIHR <go> function, select #2 Futures and enter CBOT UST instrument, TYZ8 Comdty
  • Add the similar tenor Eris 7y to the Security table, LIBZ8 Comdty
  • Enter the number of TYZ8 contracts, eg 100 and set Future Risk Type to Forward
  • The FIHR table then returns a corresponding 113 LIBZ8 contracts to offset the TYZ8 position
  • Execute order to Sell 100 TYZ8 vs BUY 113 LIBZ8 at desired spread level

Benefits of Using Eris For Swap Spread Trades

  • Automatic Portfolio Margining of Eris vs CBOT UST Futures: Net margin for the above trade is ~20-30% of the equivalent CBOT Treasury futures vs LCH cleared OTC swap
  • Live Touch -  Electronic Order Book Trading: Streaming bids & offers in both Eris and UST Futures, providing the ability to employ electronic, algo-based, automatic execution methods