While SOFR strips can solve the problem of interest rate risk for some, they come with a different issue: creating the strips requires legging futures contracts individually. Moreover, longer-dated loans and other hedges would require even longer strips of SOFR futures. Legging each contract individually can entail some risk, as the market may move before all the legs are completed. Packs and bundles can simplify these transactions for the increasing number of traders who use strips of SOFR futures.
Packs and bundles: a logical evolution
A pack or bundle may be thought of as the purchase or sale of a series of SOFR futures representing a particular segment along the yield curve, and can be used to create or liquidate strips of futures. Packs and bundles offer the advantage of being transactable at a single price or value, eliminating the need to enter multiple orders for each contract and the possibility that orders may go unfilled.
The popularity of packs and bundles is reflected in volume and open interest patterns. Unlike most futures contracts, where virtually all volume and open interest is concentrated in the nearby or lead month, SOFR futures have significant volume and open interest in the deferred months going out nearly 10 years along the yield curve.
What are packs?
A SOFR pack is the simultaneous sale or purchase of a series of four consecutive SOFR futures contracts.
SOFR futures have 39 quarterly expirations – four quarterly expirations every year for nearly 10 years. To avoid confusion, CME Group uses colors to describe individual segments of the SOFR futures curve. The “whites” represent the first year of expiries, “reds” the second, and so on until “copper,” which represents the quarterly expirations in the 10th year. The chart below further illustrates how packs are constructed.
|1st - 4th Quarterlies
|5th - 8th Quarterlies
|9th - 12th Quarterlies
|13th - 16th Quarterlies
|17th - 20th Quarterlies
|21st - 24th Quarterlies
|25th - 28th Quarterlies
|29th - 32nd Quarterlies
|33rd - 36th Quarterlies
|37th - 40th Quarterlies
For example, a trader could buy or sell a white pack, which is comprised of the first four quarterly SOFR futures contracts expirations. They could also choose to buy or sell a blue pack, which is comprised of the 13th through 16th quarterly expirations.
What are bundles?
While packs are limited to four consecutive quarterly contracts – covering one year of risk – bundles allow for multiple sets of four consecutive quarterly contracts to be traded in a single order.
For example, a trader could buy a two-year bundle, which includes the first eight quarterly SOFR futures contracts. If they choose to sell a three-year bundle, it would include the first 12 quarterly expirations.
Notice the BPV (basis point value) continues to rise as you add more quarterly expirations in a bundle, but it remains at $100 per pack. This is because a pack only contains four SOFR contracts.
|1st 4 Quarterlies
|1st 8 Quarterlies
|1st 12 Quarterlies
|1st 16 Quarterlies
|1st 20 Quarterlies
|1st 24 Quarterlies
|1st 28 Quarterlies
|1st 32 Quarterlies
|1st 36 Quarterlies
|1st 40 Quarterlies
Quoting packs and bundles
The price of a pack or bundle is meant to represent the average price levels of the individual futures contracts, or legs, within the pack or bundle. They are quoted in increments of ¼ of one basis point, equivalent to $6.25.
Trading packs and bundles
Once a pack or bundle is traded, it immediately decomposes into its constituent legs. Prices are then assigned for each of the legs, such that the average of these prices equals the traded price for the pack or bundle. Additional details about contract price assignments can be found in the SOFR Futures Packs and Bundles white paper.
Transactions involving both packs and bundles can be executed on the CME Globex electronic trading platform.
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