CME seeks to offer over-the-counter grain swaps

by Ron Sterk
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CHICAGO — The CME Group said its subsidiary, the Chicago Board of Trade, submitted a petition to the Commodity Futures Trading Commission on April 22 seeking approval to clear corn basis swaps and calendar swaps for corn, wheat and soybeans for over-the-counter trading.

"Fundamental changes in global grain and oilseed markets are creating new challenges for market users, including the need to hedge increasingly volatile basis risks in grain and oilseed markets," Robert Ray, managing director of international sales and commodity and equity products for the CME Group, said. "CME Group is responding to market needs by innovating the first-ever cleared O.T.C. grain swaps, which will offer market users the ability to hedge tailored risks in a centrally cleared environment.

"These new cleared O.T.C. grain swaps, which can be used as a complement to our highly liquid grain futures and options contracts, will be subject to position accountability, transaction reporting and margining and risk management standards that are comparable to highly successful futures contracts. These new products will enhance risk management practices, improve transparency in the O.T.C. grain swaps market and reduce counterparty credit risks for market users."

The products will be cleared through CME Clearing, which joined the petition.

Corn basis swaps are tools to help the grain industry better manage overall risk and risk of price differentials between futures delivery points and local markets, the CME Group said. Calendar swaps, which are based on the average daily settlement price for the underlying futures contract during the final month of clearing the swap, offer another way to manage price volatility, the exchange said.

Rising costs for margin calls have forced many traditional hedgers out of agricultural commodity markets. Swaps have been popular in the energy markets.

The C.F.T.C. currently is reviewing a swaps proposal for cocoa, coffee and sugar from the Intercontinental Exchange.

A C.F.T.C. exemption is required under the Commodity Futures Modernization Act of 2000 to clear the agricultural swaps. Pending approval by the C.F.T.C., the CME Group expects the swaps will be available later in 2008.

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