2014-08-15

When fiction becomes reality

In one of my recent blogs, I proposed the first episode of a series in Finance Fiction. The blog presented packs and bundles options as an addition to the interest rate exchange-traded offering; it was based on ideas initially proposed in early 2013 in a paper on STIR futures and presented in Section 7.8.6 “Ceci nest pas une option” of the book.

It turns out that either someone read the paper and the blog and took it for reality or the ideas proposed were not so fictional. CME has announced it will start offering bundle futures(1) and bundle futures options from September 2014.

I’m not an expert in legal matters: Can an author claim copyright on reality when reality copies the author’s fiction?

The quote I used in the original paper on the subject (and in the book) was
Messieurs les Anglais, tirez les premiers !
Attributed by Voltaire to the (French) Comte d'Auteroche at the battle of Fontenoy, 1745
and I continued with
The XXIst century corporate warfare is probably not as courteous as the XVIIIth century real warfare and there will probably be no similar offer, but the question is open: who will shoot first?
Now we have the answer, the first to shoot are not English but American and they are based in Chicago.  USA did not exist as a nation when the Comte d'Auteroche spoke in 1745, so the absence of a similar offer to “Messieurs les Américains” is understandable.

Those new futures offer exposure to the same underlying Libor rates as the deliverable swap futures with same expiry and tenor. It seems that CME is creating competition for its own DSF through the new bundle futures. One of the reason for this apparent duplication is probably that in term of quotation mechanism and option strike the two instruments are quite different. The bundle futures contract is quoted in rate (more precisely 1-rate) and the current CME’s DSF contract is quoted in present value. The rate dimension is more familiar to the swap and STIR futures users, the present value dimension is more familiar to bond and bond futures users. Moreover the present value quoted DSF are not well suited for options on futures that would compete with swaptions.

Some of the points mentioned above may seems a little bit cryptic. The reason I'm not more explicit at this stage is that my thoughts on those points are the subjects of subsequent episodes of the Finance Fiction series. Any good series episode finishes with a teaser to the next episode, I don’t see any reason for not using the same technique here. The titles of some of the next episodes are:
  • Collateral with zero-rate
  • Risk based swap futures
  • Options on swap futures
In the last years, two of my fictions had a rapid turn-around into reality(2): the multi-curve framework initial paper was published in July 2007 and became the base of a standard in the subsequent crisis years; options on bundles (and packs) of STIR futures were proposed in March 2013 and will become an exchange-traded product in September 2014.

Given those precedents, I hope that some of my forthcoming fictions episodes will also become reality. If you are interested by my services related to future-proof futures design, I’m available for consulting :)

(1) Bundle futures is a new term invented by CME for the occasion. It is financially equivalent to bundles on futures but a bundle futures is traded as unique contract and deliver into the underlying individual STIR futures only on expiry.

(2) For obvious marketing reasons, I do not highlight the proposals that failed to materialise, like options on composition or OIS swaption.

No comments:

Post a Comment