Fed Forecasts Pose Risk For Soft Interest-Rate Futures Volume
January 04 2012 - 7:09PM
Dow Jones News
Trading in futures contracts linked to U.S. interest rates could
decline following a decision by the Federal Reserve to publish an
explicit timetable for when it expects to take action.
The market for interest-rate derivatives already has seen a drop
in trading volumes in recent months, in part because the Fed stated
it won't raise the federal funds rate until at least the middle of
2013. Then on Tuesday, the Fed disclosed plans for a more permanent
timetable, which could further pressure trading volumes as banks,
multi-national companies and investment funds see less need to
protect themselves against short-term swings in borrowing
rates.
"The combination of telegraphing what they're doing here, and
diminished uncertainty in the near-term will certainty hurt
volume," said Jeff Horwich, a rate futures and options trader at
the proprietary firm TradeLink.
The Fed starting next month will release a timetable for when it
expects to raise the funds rate, given its projections for economic
growth, unemployment, and inflation.
Falling volumes would hit the bottom line of exchange operator
CME Group Inc. (CME), which makes its money from fees charged for
each traded contract. Futures contracts tied to interest
rates--from eurodollar futures to U.S. Treasury futures--made up
45% of all CME trading volume in 2011, making it the exchange's
largest product line.
Volumes for those products dropped 15% in the fourth quarter of
2011 compared with the same period a year earlier. CME saw a
decline of just 2% across all its products, from energy to
currencies.
The Fed's new approach to forecasting could reduce volatility in
key interest rates, causing analysts at Raymond James to voice
caution with regard to interest-rate trading volumes in 2012 and
reduce their overall earning estimates for CME this week.
While CME dominates interest-rate products, any fallout from the
new Fed communication policy would affect NYSE Euronext (NYX) and
the bank-backed platform ELX Futures LP, which list futures
contracts modeled after those at CME.
Still, CME viewed the Fed policy changes as a good for its
markets, saying in a statement it sees "greater transparency as a
positive for markets, and for customers working to manage risks,
not a negative."
Some traders voiced similar optimism. They said more
transparency by the Fed could result in central bankers talking
more freely about where they see rates going in the future,
creating a more robust flow of information to fuel trading
decisions.
"The more they talk, the more [traders] will react to what they
say," said Lawrence Morgan, senior account executive for Archer
Financial Services.
-By Howard Packowitz, Dow Jones Newswires; 312-750-4132;
howard.packowitz@dowjones.com
--Jacob Bunge contributed to this article.
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