Yield futures design - CME version

Good to see that the Yield Futures design that I proposed almost 10 years ago is finally trading. CME has announced a “strong liquidity on launch day” for its Treasury Yield Futures.

Some notes on the design I proposed are available as a blog: Risk-based futures and a working paper for the overnight-linked version: Risk-based overnight-linked futures - innovative design.

Originally the design was proposed with several variants for the underlying (LIBOR swaps, OIS, bond/treasury) and delivery mechanism (cash settled or physical settled, notional based or risk based delivery). All the variants have the same mechanism as their main feature: quoted in yield and PV01/risk based daily settlement. 

In some sense it was not even an original design as the fixed PV01 mechanism was already used for LIBOR futures. But the extension to other products was new and the idea of smooth risk at delivery was also new. Unfortunately the smooth risk feature has not be retained by CME. The futures are cash settled, so the risk jumps from a bond-like risk to nothing at expiry. That leaves some room for improvements designing new products.

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