Futurization

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Futurization refers to the process of standardizing the terms of settlement and delivery of a contract such that the contract may be listed on an exchange, rather than over-the-counter (OTC)[1] . Swaps, forwards and other similar derivatives are typically privately negotiated, bilateral (or "bespoke" transactions, tailored to meet the exact needs of the initiating counterparty. In contrast, futures contracts have standardized terms including quantity, delivery date, delivery location, and product specifications.

As regulations related to the Dodd-Frank Act, in which swaps and OTC derivatives became subject to a host of new and often costly rules, some market participants have turned to the futures market as a way to mitigate risk. In general, standardized products such as futures offer a low-cost alternative to bespoke transactions. The trade-off, however, is that standardized products may not fully mitigate risk in the same manner as a customized OTC transaction.

In the fall of 2012, the Intercontinental Exchange and CME Group "futurized" certain cleared energy swaps by reclassifying them as futures contracts.[2] On December 3, 2012, CME Group launched a deliverable interest-rate swap futures contract.[3]

References

  1. Swap Futurization – The emergence of a new business model or avoiding regulation and retaining the status quo?. DerivSource.
  2. ICE shifts OTC energy swaps to futures. Financial Time.
  3. Deliverable Interest Rate Swap Futures. CME Group.