Esen Onur

Dividend Swaps and Dividend Futures: State of Play

The authors of this article use derivatives regulatory data to quantify the over the counter (OTC) index dividend swap market and contrast it with the listed index dividend futures market. They find US

Swap Trading after Dodd-Frank: Evidence from Index CDS

2.5 billion in notional outstanding of market-facing OTC dividend swaps between dealers and end users, with another US

Volatility Derivatives in Practice: Activity and Impact

4 billion outstanding between dealers. The majority of the dealer–dealer swaps are in the S&P 500 (which has no listed futures contract), whereas the majority of transactions for non-U.S. underlyings are between dealers and end users. Although very standardized OTC swaps and listed futures coexist for several major indexes, only the listed EURO STOXX 50 future clearly dominates the OTC market, with nearly five times the notional outstanding of the OTC swaps. The authors observe an average of around one end user transaction per week for the OTC EURO STOXX market, with less activity in other indexes. Risk transfer appears to be largest for the EURO STOXX 50, with dealers net short nearly US

The Effect of Pit Closure on Futures Trading

1 billion notional to end users.

Anticipatory Traders and Trading Speed

The Dodd-Frank Act mandates that certain standard OTC derivatives be traded on swap execution facilities (SEF). This paper provides a granular analysis of SEF trading mechanisms, using message-level data for May 2016 from the two largest customer-todealer SEFs in index CDS markets. Both SEFs offer various execution mechanisms that differ in how widely customers’ trading interests are exposed to dealers. A theoretical model shows that although exposing the order to more dealers increases competition, it also causes a more severe winner’s curse. Consistent with this trade-off, the data show that customers contact fewer dealers if the trade size is larger or nonstandard. Dealers are more likely to respond to customers’ inquiries if fewer dealers are involved in competition, if the notional size is larger, or if more dealers are making markets. Finally, dealers’ quoted spreads and customers’ transaction costs increase in notional quantity and the number of dealers involved. In addition to results related to the winner’s curse, past trading relationships also affect customers’ requests and dealers’ responses. Our results contribute to the understanding of swaps markets by providing insights into the trade-offs faced by investors and dealers.

Exploring Commodity Trading Activity: An Integrated Analysis of Swaps and Futures

We use unique regulatory data to examine open positions and activity in both listed and OTC volatility derivatives. Gross vega notional outstanding for index variance swaps is over USD 2 billion, with dealers short vega in order to supply the long vega demand of asset managers. For maturities less than one year, VIX futures are far more actively traded and have a higher notional amount outstanding than S&P 500 variance swaps. To the extent that dealers take on risk when facilitating trades, we estimate that the long volatility bias of asset managers puts upward pressure on VIX futures prices. Hedge funds have offset this potential impact by actively taking a net short position in nearby contracts. In our 2011‐2014 sample, the net impact added less than half a volatility point, on average, to nearby VIX futures contracts but added between one and two volatility points for contracts in less liquid, longer‐dated parts of the curve. We find no evidence that this price impact forces VIX futures outside no‐arbitrage bounds.

Interest Rate Swap Market Complexity and Its Risk Management Implications

Motivated by the Chicago Mercantile Exchange’s (CME) decision to close down most of the futures pits in July of 2015, we analyze how this event may have affected the livestock and treasury futures markets. We find that although the already declining futures pit trading decreased further after the pit closure, it has not completely disappeared. Execution costs, following the pit closure, appear to have increased for livestock futures and declined for treasury futures transactions on the electronic platform. We, also, find that pit users, who had been active in both trading venues, remain active in the electronic market. However, there is no evidence of pit traders (locals) transitioning to the electronic market. Nevertheless, some of them are still active in options pits. When we explore the changes in daily trading patterns, we observe an ongoing shift in the timing of trading hours for livestock futures, but we note that this shift is unlikely to be driven by the pit closure.

Trader Positions and Marketwide Liquidity Demand

We investigate a class of market participants who follow strategies that anticipate local price trends. These anticipatory traders can correctly process information prior to the overall market and systematically act before other participants. They use manual and automated order entry methods and exhibit varying processing speeds, but most are not fast enough to be high frequency traders. In certain cases, other participants are shown to gain by detecting such trading and reacting to avoid adverse selection costs. To identify these traders, we devise methods to isolate local price paths using order book data from the WTI crude oil futures market.

How Much You Know Matters: A Note on the Exchange Rate Disconnect Puzzle

This paper presents an analysis of new, regulatory data on commodity swaps, focused on West Texas Intermediate (WTI) crude oil. We find that commercial end-users have a much larger footprint in the WTI swaps space than financial end-users do. Commercials have a much larger exposure in swaps than in futures and are net short in both markets. Financial end-users are smaller in swaps than in futures and are net long in both markets. Swap Dealers perform a substantial amount of intermediation among WTI longs, WTI shorts, and index investors; consequently, net dealer exposure to hedge in futures markets is far less than the gross swap exposure.

The Effect of Settlement Rules on the Incentive to Bang the Close

The primary objective of this paper is to study the post Dodd-Frank network structure of the interest rate swap market and propose a set of effective complexity measures to understand how the swap users respond to market risks. We use a unique swap dataset extracted from the swap data repositories (SDRs) to examine the network structure properties and market participants’ risk management behaviors. We find (a) the interest rate swap market follows a scale-free network where the power-law exponent is less than 2, which indicates that few of its important entities have a significant number of contracts within their subsidiaries (a.k.a. interaffiliated swap contracts); (b) swap rate volatility Granger-causes swap users to increase their risk sharing intensity at entity level, but market participants do not change their risk management strategies in general; (c) there is a significant contemporaneous correlation between the swap rate volatility and the underlying interest rate futures volatility. However, interest rate swap volatility does not cause the underlying interest rate futures volatility and vice versa. These findings provide the market regulators and swap users a better understanding of interest rate swap market participants’ risk management behaviors, and it also provides a method to monitor the swap market risk sharing dynamics.