Clearing and Counterparty Exposure in Deliverable Swap Futures
Summary
The document distinguishes deliverable interest-rate swap futures from the swaps they may deliver into. The listed instrument is a futures contract, so it is not issued like a security and does not begin as a bilateral swap between the original buyer and seller. Futures positions are traded in the market, and the clearing house interposes itself between market participants, becoming the effective counterparty to each side while the contract is open.
At expiry, delivery eligibility is restricted to qualifying participants, as described in the cited exchange rules. The response notes that the clearing house’s financial safeguards apply to the futures contract and to a swap delivered in fulfillment of it. This clearing arrangement reduces direct bilateral counterparty exposure, but the document does not quantify residual clearing-house risk or explain the full delivery process. The practical answer is therefore that the exchange is not an issuer, while clearing makes the participant effectively face the clearing house; delivery can involve eligible market participants under the rules.
Key ideas
- Deliverable swap futures are listed futures contracts, not swap contracts themselves.
- Futures are created and extinguished as open interest changes rather than issued like securities.
- The clearing house interposes itself as the effective counterparty to both sides of a futures position.
- Delivery at expiry is limited to participants meeting the exchange’s eligibility requirements.
- Clearing safeguards cover the futures contract and the swap delivered to fulfill it, though residual risks are not quantified.
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Full text
# Who is the issuer and the counter part of this instrument? # Who is the issuer and the counter part of this instrument? I have the following SWAP contract : T1UH4 which is a 2-Year Deliverable Interest Rate Swap. Product info : http://www.cmegroup.com/trading/interest-rates/deliverable-swaps/2-year-deliverable-interest-rate-swap-futures.html Who is the issuer and the counter part of this SWAP in case I trade it ? Is it by default the CME Group ? Thank you ## Answer by Brian B (score 1) https://quant.stackexchange.com/a/10526 The counterparty could be practically anyone, since the rulebook says ``` 51104. DELIVERIES ON EXPIRING FUTURES CONTRACTS 51104.A. Requirements for Participation in Delivery For an account carried by a clearing member to make or accept delivery on an expiring futures contract, the holder of such account is required to be: 1. an Eligible Contract Participant, as that term is defined in Section 1a(18) of the Commodity Exchange Act (7 USC §1a(18) and 17 CFR 1.3(m)), and 2. either an IRS Clearing Member (CME Rule 90005.A.) or an IRS Participant registered with CME by an IRS Clearing Member (CME Rule 8F009. and CME Rule 90005.B.). ``` This may make you think you need to worry about counterparty risk quite a bit. However you are effectively facing CME since ``` 51104.G. Clearing House Financial Safeguards A futures contract made under these Rules shall be a Base Guaranty Fund Product subject to the Clearing House financial safeguards provided by the General Guarantee Fund (CME Rule 802.A.). An IRS Contract that is delivered or accepted for delivery in fulfillment of a futures contract made under these Rules shall be an IRS Product subject to the Clearing House financial safeguards provided by the IRS Guaranty Fund (CME Rule 8G07.) ``` ## Answer by deprecated (score 0) https://quant.stackexchange.com/a/11226 While linked to swaps, these are listed futures contracts like any other and are traded in open markets. They are not themselves swap contracts. Therefore there is no 'issuer' exactly, nor a counterparty, at least not the same sense as swaps. See details here and here. ## Answer by user7056 (score 0) https://quant.stackexchange.com/a/14355 In a futures contract, the exchange clearing house itselfs acts as/is the counterparty to both parties in the contract (and this is why the credit risk is heavily reduced). Futures are not issued (like other securities) but are created, whenever Open interest increases (and destroyed whenever Open interest decreases); the contracts are not between the original buyer and the original seller, but between the holders at expiry and the exchange house.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.