OIS on the rise in swap market, but not yet in futures

OIS on the rise in swap market, but not yet in futures

From June 29, dollar, euro and sterling trades in SwapClear will be revalued using OIS.

LCH.Clearnet already uses OIS rates to price the rate of return on cash collateral.

LCH operates the world’s leading interest rate swap clearing service, SwapClear.

Previously – in line with market practice – the portfolio was discounted using Libor. However, an increasing proportion of trades are now priced using OIS discounting.

The clearing house says it has decided to move to OIS to ensure the most accurate valuation of its portfolio for risk management purposes. “It’s not so much direct customer demand – it’s just the way the market’s going,” an LCH.Clearnet spokesperson said. “We have to margin portfolios effectively.”

The spokesperson said many banks were increasingly trading swaps based on OIS rather than Libor.

The move is part of a trend in the interest rate markets that could lead to increased demand for hedging on exchanges against OIS rate movements. No exchanges offer any such contracts for sterling or euro OIS, and a spokesperson for Eurex said it had no immediate plans to launch OIS futures.

Liffe, the main trading venue for sterling Libor and Euribor futures, would not comment.

In the US, the Chicago Mercantile Exchange has Three Month OIS Futures and Options on the dollar rate, but trading of these has declined this year. In the first five months of 2010 only 300 contracts changed hands, compared with 16,159 in 2009 as a whole. The options do not trade.