CHICAGO — CME Group is set to launch trading April 5 on a series of over-the-counter agricultural swaps, Richard Jelinek, CME associate director of commodity products, said this week.
Introduction of the products for corn, soybeans and wheat was made possible by a March 18 order from the Commodity Futures Trading Commission permitting the Chicago Mercantile Exchange to "clear certain bilateral over-the-counter swap transaction" involving the commodities.
Calendar swaps for corn, wheat and soybeans will facilitate O.T.C. swaps, which are privately negotiated contracts between buyers and sellers of a physical contract. Swaps allow flexible contract terms, for instance for delivery periods further into the future than covered by exchange contracts trading.
For corn, the CME also is launching a series of corn basis swaps for six locations — northeastern Iowa, northeastern Iowa, southern Iowa, eastern Nebraska, eastern South Dakota and southern Minnesota.
Mr. Jelinek said the exchange is studying the possible introduction of additional basis points, including port locations. Also under consideration are basis swaps for wheat and soybeans. He said off-exchange O.T.C. trading in agricultural commodities currently is small.
"But it’s growing, and O.T.C. trading overall has grown dramatically," he said. "Growth has been most evident in energy."
According to the CME, counterparty default risk stands as a principal disadvantage of O.T.C. swaps together with limited market transparency and a lack of market oversight.
The exchange sees its product as a way to counter these disadvantages by creating a central counterparty model, a clearing house that is "the buyer to every seller and seller to every buyer," the CME said.
At the heart of the CME swaps program is its CME ClearPorts system, an open clearing service for O.T.C. products. The exchange described the swaps as a "complement" to its grain futures and options contracts. The swaps will be subject to position accountability, transaction reproving and margining and risk management standards that are comparable to grain futures contracts.
"Changes in global grain and oilseed markets are creating new challenges for market users, including the need to hedge increasingly volatile basis risk in grain and oilseed markets," said Rick Redding, CME Group managing director of products and services. "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 create tailored hedges in a centrally cleared environment. This is a key component of our CME ClearPort strategy, which already includes more than 600 energy-related O.T.C. products, to expand into additional asset classes starting with agriculture."
Users of the new O.T.C. swaps will register with the CME Group ClearPort system and affiliate with a futures commission merchant.
Each C.M.E. swap contract is for 5,000 bus and is brought to CME Clearing. Daily settlement price for the calendar swaps will be established based on the underlying futures contract month closest to the swap month.
CME Group operates the CME and CBOT and offers an array of products available across various asset classes.