Invoice Swaps: Margin Efficiencies at CME Clearing

Unlock Savings by Portfolio Margining Cleared Swaps with Futures

CME Clearing offers portfolio margining of Interest Rate Swaps (IRS) against its Interest Rate futures, for house accounts,creating opportunities for participants to achieve new and potentially substantial capital savings by clearing invoice swaps, also known as invoice spreads.

Invoice swaps represent a substantial portion of daily transactions in the US Dollar IRS market. An Invoice swap is a spread-trade consisting of a long (short) Treasury futures contract and a DV01 matched forward starting fixed-rate payer (fixed-rate receiver) IRS that begins on the last delivery day of the futures contract and matures on the maturity date of the futures underlying "cheapest to deliver" (CTD) Treasury security.

Swap spreads are also a significant portion of daily transactions in the US Dollar IRS market. Swap spreads are similar to invoice swaps, except they combine IRS with a DV01 matched position in Treasury securities. Because Treasury securities are not impacted by the Dodd-Frank derivatives clearing mandate, new IRS margin requirements can significantly increase margin costs, as the cash securities fall outside the clearing house. Accordingly, participants have started representing swap spreads as invoice swaps (CME-cleared IRS vs. Treasury futures) to take advantage of the capital efficiencies that may eliminate most of the Dodd-Frank margin costs.

The full report includes examples to illustrate these margin efficiencies.

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