Substitutions of futures for forwards allow clients to substitute futures contracts for an over-the-counter (OTC) transaction, such as an Interest Rate Swap, resulting in a cleared futures contract with the flexibility of an OTC transaction. Substitutions or "Subs" allow market participants to streamline the transaction process, consolidate OTC and futures positions for administration and clearing, and work with a single counterparty - CME Clearing.

On Monday, October 23, CME launched a new pricing program as part of the Clearing360™ initiative to extend its existing clearing services to the OTC marketplace. Under the new pricing protocol for EBFs and Subs, OTC swap-to-futures substitutions can be done at a favorable cost compared to OTC market bid/ask spreads. Substituting a strip of CME Eurodollar futures for a swap becomes even more price effective with longer maturities. Prices are based upon a sliding scale where the per contract cost declines as the term of the transaction increases.

In the table below, the “Total/Contract” column shows what the per contract cost would be for each year of CME Eurodollar expirations. For example, the combination of the CME Clearing and SUB/EBF fees would be $0.99 per contract if eight consecutive quarterly expirations were bought or sold for an all-in cost per strip of $7.92. With longer maturities, however, SUB and EBF transactions are even more cost effective, with costs per contract for transaction extending out 5- to 7-years at $0.49 to only $0.29, respectively!

Now it is even more attractive for risk managers to use CME Clearing360 to take advantage of existing systems and infrastructure offered by CME and its clearing member firms. CME Clearing membership is not required to use CME Clearing360 services, but a relationship with a CME clearing member firm is required.

To learn more about CME Subs, click here or contact the CME Group Interest Rate team at 866-501-3646.