Why Futures Use Standard Expiries While OTC Rates Use Custom Tenors

# General conventions in Futures prices for commodity


# General conventions in Futures prices for commodity












When I look into different Futures quotes of commodities in CME, all of them are based on Expiry month e.g. Dec-2024 etc.

However on the other hand, for fixed income e.g. Swaps, Swaption etc rates are quoted as time to expiry i.e. one month, one week, 20 years.

My question is why such different practices are followed?

## Answer by ThatDataGuy (score 1)

https://quant.stackexchange.com/a/78270

Futures contracts have specific dates so as to concentrate all liquidity into a small set of identical deals. This is more efficient for the market and leads numerous effects eg, tighter spreads etc.

OTC fixed income is well, OTC. So it can be whatever you want and participants often want to specify exactly how the cash flows fall, as this enables them to balance cash flows they have due to other business.

An important distinction to note here is that futures exchanges don't directly offer risk. They operate the exchange, but another customer is always on the other side of your trade. In other words, the exchange does not take on the other side of your deal unless it has found someone to do the opposite with. Therefore, custom deals would be basically impossible to match at scale.

In OTC markets, when you want to trade, you ring a broker / bank who creates a deal for you and assumes the other side directly. So in practice they can structure the cash flows to whatever you need (assuming the prices is right of course). This means that banks end up with thousands of kinda offsetting deals with hundreds of clients, and yes it's a mess. Sometimes two banks have tens of thousands of deals with each other, and they compute the sum and agree to one new summation deal and tear up the old ones.

Additionally, there ARE many market 'conventions' in the fixed income and fx OTC markets that do make things easier / faster / more liquid. For example, many market participants agree to use the same set of dates for forward starting FX and IRS, called IMM dates. So if you ring the bank and ask for "Dec IMM forward starting USD 10y vanilla IRS 100M", and get "14 / 20' and you reply "mine", well you've done a deal and it's likely you'll agree on what that exactly was. Specifically in this case "14 / 20" would be a quote, where the quote consists of two prices 14, and 20. You would have know by convention exactly what that means. "Mine" refers to you "buying" the deal. For IRS I believe this means receiving fixed vs paying floating rate. The opposite is "yours" where you "sell" the deal. Again, by convention, both sides know exactly what these things mean and there is almost always complete agreement.

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/78771

In my opinion, when market participants feel that insufficient liquidity causes bid-offer spreads that are too wide for their preferences, difficulties in reassignment, and similar problems, they seek to concentrate the available liquidity in a few spots with more liquidity. This behavior isn't limited to standardized maturities. Consider credit derivatives, for example.

Lenders issued letters of credit (LOC) for centuries. But n the 1990s, some very smart people at JPMorgan standardized credit default swaps(CDS), igniting a secondary market. For the first few years, CDS were traded like interest rate swaps, cross-currency swaps, or FX forwards - $n$ years maturity meant exactly $n$ calendar years from the settlement / protection start date, or sometimes the swap matched the maturity of the reference obligation. Also the fixed leg was chosen so that the mark to market of the swap would be close to 0 at inception, i.e. the upfront fee was usually 0, and the running spread was an arbitrary fraction of the notional.

A few years later the market participants saw that the insufficient liquidity n the new product caused problems, so they collectively standardized CDS maturities to a short list of IMM dates (December 20 etc, not the same IMM dates as futures) and also a short list of standard running spreads, resulting in non-zero upfront fees.