CME faces questions over pending swaptions service
The interest rate swaptions market – bifurcated and largely illiquid – will not be easy to drag into clearing houses, although the benefits could be huge. CME Group hopes to launch a service, but dealers are viewing it with caution
They are tried and tested products, with a broad, loyal user-base, but when it comes to clearing, interest rate swaptions have so many quirks that one dealer describes them as "toxic waste". Buy-side demand focuses on European-style swaptions, leaving dealers structurally short on that portion of the market. In turn, dealers balance their portfolios using Bermudan-style or mid-curve swaptions, yield curve spread options and constant maturity swaps.
The problem with taking the more liquid portion
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