May 2020 Rates Recap

1) Reduced tick size to 1/8 of 1/32 (from 1/4 of 1/32).

• Builds on the success of the 2-Year tick cut in January 2019 which improved cost-to-trade by up to 32% and attracted more end user participation.
• Brings greater alignment between 2s and 3s for seamless spread trading.

2) New matching algorithm of 100% FIFO for outrights (from 40% FIFO/60% Pro-Rata). Calendar spreads will remain 20% FIFO/80% Pro-Rata.

3) A more robust deliverable basket through the addition of aging 7-year notes with remaining term to maturity that ranges from 2 years, 9 months to 3 years.

• Increases the size of the basket from roughly 8 issues/$288B to 12 issues/$400B, bringing the 3s in line with 2s and 5s.

Much has changed since 3-Year futures launched in 2009:

1. Most notably, futures account for a much larger share of the daily risk transfer in Treasury markets having seen exponential growth in the institutional user base, nearly 3X growth in trading volumes and 4X growth in open interest.
2. Investors have a greater appetite for additional tenor points as evidenced by the success of the Ultra T-Bond (launched 2010) and Ultra 10-Year Note futures (launched 2016).
3. Spread trading between Treasury futures has become more efficient with the rise of CME Globex-listed Inter-Commodity Spreads (ICS) which saw record volume in Q1.

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In a new research paper, we analyze futures market liquidity during the largest spike in volatility since the financial crisis, exploring cost-to-trade relative to the daily range and volume for a more holistic assessment.

Our findings show that economic risks caused by virus concerns reduced order book depth but relative cost to trade actually declined when compared to the expansion in daily trading ranges.

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