Advantage Futures

Interview with Agha Mirza Managing Director and Global Head of Interest Rate Products CME Group

June 2016

Agha Mirza serves as CME Group’s Managing Director and Global Head of Interest Rate Products and is responsible for the management and growth of CME Group’s Interest Rate Futures and Options products. He holds both a Master of Science degree and a Bachelor of Science degree from MIT.

What has this year been like for CME Group’s Interest Rates products in terms of new product development?

AGHA: Our biggest story for 2016 is the launch of Ultra 10 Year U.S. Treasury Note futures and options. The idea of Ultra 10 came about after hearing from various participants and clients looking for an instrument to fill the gap in the treasury yield curve. Going into launch and post-launch, it became apparent the utility for Ultra 10 was much more than just filling the yield curve gap between the classic 10-year note (TY) treasury yield and classic bond (US) contracts. An increasing number of market participants are attracted to Ultra 10 because it provides a liquid, efficient futures-based mechanism of trading the 10 year point on the curve. In the first three months following launch, participants traded more than 2.3 million total contracts, running an average daily volume (ADV) of 45,000 contracts per day and with open interest reaching 106,000 contracts. Active trading takes place in all three global sessions – US, Asia and Europe, and participants use various ways to trade the instrument, including outright, EFP, EFR and inter-commodity spreads.

Based on volume traded, it is a record launch in CME Group’s 148-year history.

What have overall Interest Rate volumes been so far in 2016?

AGHA: The first quarter has been strong, not just for Ultra 10, but across the Interest Rates complex. Both Eurodollar and treasury futures volumes were up in the first quarter. Options volumes were particularly strong. We had a record Eurodollar options quarter with ADV of 1.5 million contracts. Fed fund futures had a record quarter as well with ADV of 122,000 contracts.

Why are we seeing such strong volumes in both options and futures?

AGHA: Talking to market participants we find that regulation in the marketplace, initially the Dodd-Frank Act’s clearing and trading requirements for swaps and Basel III SLR, all impact the trading of other adjacent markets and are essentially increasing the cost of trading. Customers are seeing reduced liquidity in adjacent markets, while standardized futures and listed options have maintained deep liquidity. Those phenomena or trends are reflected in measures such as treasury futures penetration of cash. CME Group maintains an index which measures treasury futures trading as a percentage of cash treasuries as reported by primary dealers. That index has moved from 59% in 2012 to currently 76%.

I’m curious about the 70% of treasury options that were electronic.

AGHA: The increasing electronic percentages have certainly been exciting as that has brought new volumes to the exchange. As I mentioned earlier, first quarter reached a Eurodollar options record at 1.5 million contracts ADV. Open interest reached 41 million contracts. According to the CFTC Traders in Financial Futures Reporter, which showcases large open interest holders, we are seeing increased breadth of participation in CME Group’s markets. We also believe that the expansion of our product offering over recent years has contributed to volume growth. Naturally, futures also offer significant capital efficiencies, as well as consistent liquidity that may have contributed to record volume and open interest. An exciting development is the increase in electronic percentages. So, Treasury options in the first quarter were 71% electronic (up from 62% in Q1 2015), while Eurodollar options grew to 22% electronic (up from 14% in Q1 2015).

Why is the steady increase in electronic percentage of volumes relevant or important?

AGHA: There is a set of clients, particularly international clients, who find electronic access easier, as well as who value greater transparency through electronic prices. It tends to bring those participants into our markets, providing a more diverse liquidity pool that benefits all participants. That’s why electronic percentages are important.

10 years ago, Wall Street banks were probably much bigger participants in CME Group’s markets than they are today, yet you are still experiencing growth. How do you account for that?

AGHA: Banks themselves are changing and consolidating. Fifteen to twenty years ago there were many more banks compared to today, making that data difficult to measure. I would say as our markets have grown to new highs, most of the bank volumes have also grown. Factors like technology and shifts of volume between participants–the marketplace responds to that sort of natural evolution. I think what is most important is the significant diversification of participants in our marketplace.

Your volumes are increasing but the pie is also growing. The Fed is certainly helping to increase volumes and open interest.

AGHA: That is true. I think there are interesting dynamics taking place. When the Fed raised rates in December they indicated another four rate hikes in 2016. Since then, because of global uncertainties and slowdown elsewhere in the world, along with additional monetary easing and rate cuts down to negative levels, the marketplace has lowered expectations of Fed rate hikes in 2016. Yet, US economic numbers are strong enough that some people argue this near-zero monetary policy will be hard to sustain and justify. For example, the unemployment rate is currently near all-time lows at 4.9%. The core CPI, year-over-year, as of April 2016, is now above 2%, at 2.1%. All of that data will keep the Fed in play, whether we get one rate hike this year or three, time will tell, and that will be partly driven by global economic and geopolitical developments.

What will happen if the rates rise?

AGHA: There is significant uncertainty as to whether rates will actually rise meaningfully in 2016. But if they were to rise, we may see higher volatility in our markets coming from hedging fixed income portfolios that have been used to zero-bound rate policy and, essentially, range-bound long term rates.

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