January 23, 2012 / 8:10 PM / 6 years ago

UPDATE 2-CME to expand clearing of ag swaps in February

* CME to clear 5 bullet swaps: corn, wheat, soy, meal, oil

* Exchange adds soymeal, soyoil, crush calendar swaps

(Adds details, by-line)

By Christine Stebbins

CHICAGO, Jan 23 (Reuters) - CME Group (CME.O), the world’s largest derivatives exchange, said on Monday it will expand its offering of “swap” contracts for grain commodities by listing eight new grain and oilseeds swaps for central clearing by the CME on Feb. 13.

Swaps are private, over-the-counter agreements between traders to exchange financial obligations. They are widely used in the currency and interest rate markets to supplement risk management positions taken by banks and other traders in market-based futures and options contracts listed and cleared on exchanges like the CME.

“Ag swaps” are a much smaller market with CME listing its first clearing arrangements for the private deals in April 2009 to provide its customers with greater flexibility to manage risk. It started off slow but CME’s value offering through its central market clearing of trades is catching on, officials say. The clearing arrangement means that the biggest risk in the private deals – that the counter-party won’t make good on the deal – is dealt with by the CME, which marks the deals to market and enforces compliance.

Swap contracts on corn have been the most popular of the initial group which included wheat and soybean swaps. These were “calendar” swaps – deals marked to the futures price and settled at an average weighted price of the CME futures contract.

OTC cleared ag swaps volume: link.reuters.com/kys26s

CME said on Monday it will expand its clearing of calendar swaps on Feb. 13 for the other most-active grain commodities it clears -- soybean meal and soybean oil.

“There continues to be a strong OTC and options market out there but to serve that market it’s our view that we need to have a reasonably complete product line of what people are trading today. So this another step forward in developing that product line,” Tim Andriesen, CME managing director for agricultural commodities told Reuters in an interview.

CME will also list clearing for soybean board crush calendar swaps – which will allow tailor-made swaps to work in concert with the traditional and very active “spread” trades by soybean processors. Processors routinely buy soybean futures and sell meal and oil futures simultaneously, locking in a specific “crush” profit margin on the futures board.

CME says calendar swaps can be beneficial for companies that continually purchase grain and have average price exposure, such as ethanol producers who buy corn every day.

But in addition to the three new calendar swaps will be added five new “bullet” swaps, which are deals that reference the futures price and are marked to the futures price every day all the way to the swap’s expiration, CME said on Monday.

CME said bullet swaps will be beneficial for customers who want the flexibility of an over-the-counter product that looks like the futures contract, such as a grain elevator that buys grain more sporadically. Bullet swap clearing will be offered for all five commodities but not for the soybean crush deals.

CME had hoped to launch these products two years ago along with live cattle and lean hog swaps.

“Unfortunately they got caught up in all the rule making around Dodd Frank and have been delayed until this point in time,” Andriesen said.

The livestock and dairy contract swaps have yet to be launched but Andriesen expects at least some of those to be listed in 2012, adding that customers have expressed strong interest in centrally cleared agricultural swaps as a way to complement CME’s underlying futures.

CME said the new swaps will be cleared through its Clearport screen system, which also handles the current calendar swaps in OTC corn, wheat and soybeans and provides access to more than 10,000 potential counter-parties for swaps.

Corn swaps have led the way for the new clearing of the OTC deal due to interest among ethanol plants, traders say, which now consume about 40 percent of the massive U.S. corn crop. The biggest trading days tends to follow USDA report days when fresh government data has caused a price-limit move -- sending traders to swaps and options markets.

CME’s latest offerings are the first ag swaps to debut after the Commodity Futures Trading Commission’s new swaps rule, effective Jan. 1.

(Reporting by Christine Stebbins; Graphics by Gavin Maguire; Editing by Marguerita Choy; Editing by David Gregorio)

((christine.stebbins@thomsonreuters.com)(312-408-8720)(Reuters Messaging: christine.stebbins.reuters.com@reuters.net)) Keywords: CME/GRAINS

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