March 20, 2009

The Commodity Futures Trading Commission has given regulatory approval for the CME Group to clear corn basis swaps and calendar swaps for corn, wheat and soy.

 

The swaps, which will be subject to comparable rules and regulations for listed corn, wheat and soy futures contracts on the Chicago Board of Trade, are scheduled to be available beginning Monday, April 6, through CME ClearPort, an open clearing service for over-the-counter products.

 

The CME Group owns the CBOT.

 

"Any kind of new technology or product that will reduce counterparty risk and is more adaptable to world trade is desirable as the grain markets take on more of a global presence," said Jason Roose, analyst with US Commodities in West Des Moines, Iowa.

 

The CBOT anticipates the new products will enhance risk management practices, improve transparency in the over the counter grain swaps market and reduce counterparty credit risks for market users.

 

Over-the-counter refers to derivatives not listed on any recognized exchange. OTC agreements between counterparties have terms tailored to a counter party's needs and may specify commodities, instruments and/or maturities that are not offered on any exchange.

 

A swap is a private agreement between two counterparties who agree to exchange cash flows based on a notional amount tied to a floating index, in exchange for cash flows based on the same notional amount tied to a fixed index. Swaps are normally traded in OTC markets and can have tailored terms and conditions with performance risk assumed by the involved parties.

 

CME Group petitioned CFTC to clear OTC swaps at a time when many industry participants and trade groups had questioned the viability of CBOT markets as a hedging tool amid the increased participation of index and hedge funds.

 

"The products have the potential to attract a new client base as the markets evolve globally, similar to when exchanges began trading overnight to satisfy interest from overseas markets," Roose said.

 

The viability of the products lies in the CME clearing house, as it brings a sense of legitimacy to this area, a cash-connected CBOT broker said.

 

An OTC swap transaction allows two parties to tailor a contract to their specific needs, have a sense of privacy and can be negotiated for unique quantities, qualities, and contract provisions.

 

The swaps will allow participants to secure large transactions at a specific price without the risk of the volatile price swings in the futures market that may occur once a large order enters the market, the cash-connected trader said.

 

Corn basis swaps are tools designed to help the grain industry better manage overall risk, and calendar swaps, which are based on the average daily settlement price for the corresponding underlying futures contract during the final month of clearing the swap.