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CME Group Interview: Our Views on the Current Volatile Market

No one will ever forget the 2020. In the first half of the year, investors have seen extreme movements in markets. There’s no doubt the market uncertainty has increased to a marked level.  What is the view of CME Group, the world's largest derivatives exchange, and how has it responded to the unusual market environment?

Recently, Nanhua USA conducted an interview with Derek Sammann, Senior Managing Director and Global Head of Commodities & Options Products at CME Group. Followings are Mr. Sammann's responses to investors' concerns from the market features, crude oil market, gold market and Treasury bond market.

Market Features

Q1: With critical events in the first half of 2020 like Covid-19 Pandemic, economic recession, Crude Oil price plunge, and U.S. stock market 4 times triggering of Circuit Breaker, etc., how do you perceive the current economy?

We saw unprecedented volatility in the first part of the year in several markets, and that has continued in the second quarter.  Though I’m not an economist, I can tell you that market participants are coming to our markets and our benchmark products to manage continued uncertainty throughout the global economy. During the period, we saw significantly increased levels of client hedging and risk transfer, across all products and time zones. With market uncertainty likely to continue through the year based on impacts from things like the global pandemic and the US elections in the Fall, we continue to see customers actively use our products to hedge their exposures in everything from crude oil to equities to gold.

Q2: What is the role of futures market in the current economy, and how is it performing?

At CME Group, market participants trade futures and options contracts to manage their risk across every major asset class.  We provide the widest range of global benchmark products, including interest rates, equity indexes, foreign exchange, energy, agricultural commodities and metals.  These markets are performing a critical risk management function across major asset classes in all time zones.  In the first quarter 2020, CME reached a record average daily volume of 27 million contracts, up 45% for first quarter 2019. Trading outside of the US also achieved a record for the same period of 7.2 million contracts up 57% year on year.  So at a time of unprecedented volatility and market uncertainty, we continue to see customers manage their global market risks with CME Group benchmark futures and options products.

Crude Oil Market

Q3: On April 20, the settlement price of May Crude Oil Front Month Contract was -$37, which was the first time that CME crude oil futures price became negative. What caused the negative price of crude oil futures?

Over the first few months of 2020, continued downward price pressure and a significantly steepening contango created unique challenges for the global oil market. There was a significant oversupply of oil –especially in the US where the storage facilities in Cushing, Oklahoma became full.  At the same time, we saw a drastic decrease in global demand, dropping from 100 million barrels a day to only 70 million in just a few weeks.

In early April, CME Group proactively informed our regulator, our clearing firms and the marketplace that our trading and risk management systems were capable of handling negative prices should market dynamics require it. On April 20, these underlying physical market dynamics led to dramatic price moves and CME Group accommodated negative futures prices on WTI so that clients could manage their risk, while also ensuring the convergence of futures and cash prices. Our markets performed as designed, and we eventually saw these market fundamentals drive WTI into negative territory for the first time on April 20th before settling with a final price of $10.01 on April 21st, where 2.4 million barrels of WTI went to delivery.

Since that time, we’ve had two monthly expirations, all settling in positive price territory as the improving fundamental factors of supply, demand, and storage utilization have moderated the downward pressure on Crude Oil prices.

Q4: Some people have suffered great losses when the price of WTI crude oil futures became negative. Some analysts believe that investors may shift their trading from CME WTI crude oil futures to ICE Brent crude oil futures. What is your opinion on this?

Today, WTI represents 56% of the global trade in crude oil futures, including more than 55% in May and 53% in June.  These figures are consistent with what we saw in 2019, so the market continues to utilize WTI as the primary global crude oil benchmark. WTI continues to be the market's choice for managing global crude oil exposure and we believe that is because optimal commodity benchmarks are based on physically-delivered products. Physical delivery is the gold standard of these contracts because it ensures convergence of the underlying cash market. Commercial and end-user customers who participate in physical oil markets need the certainty that convergence provides so that they can optimally manage their underlying risk. WTI futures settle with actual transactions that result in physical delivery as opposed to other products which are disconnected from physical oil and settled via assessments. We are pleased that CME Group’s WTI futures benchmark continues to reflect broad participation from all client segments around the world and in every time zone.

Q5: A few weeks prior to WTI Crude Oil futures trading negative, CME Group had notified the market and its regulator that its systems supported negative pricing, and later modified the options quoting formula allowing the strike price to be negative. How does CME Group anticipate and manage these types of situations?

As an exchange, we continually assess the fundamentals in the market and prepare our systems should market conditions change.  We also have early, proactive communication with clearing firms, FCMs and our regulator to make sure people are prepared. There were no changes made to the product specifications or other rules for WTI crude oil futures that caused the product to go negative; rather, the fundamentals in the market reflected the negative pricing, and therefore the contract did as well.

Gold Market

Q6: In April, CME Group launched a new gold (Enhanced Delivery) futures contract, allowing delivery in size of 100 ounces, 400 ounces and kilo bar sizes.  Why did you launch this contract and is it related to issues around physical gold supply?

During the exceptional market conditions in April, we saw an increase in client demand for a broader range of delivery needs that included additional functionality in terms of deliverable bar size.  By offering a choice of delivery sizes, as well as inter-commodity spreads with our benchmark gold futures, this new contract will provide customers with maximum flexibility in managing physical delivery.we continually assess the fundamentals in the market and prepare our systems should market conditions change. 

Q7: On April 29th, CME Group Secures $ 7 Billion Credit Line "In Case of COMEX Member Default, is this considered a normal procedure of CME? Does it indicate that gold trading may have significant risks?

Our credit line is renewed annually, so this is a standard procedure that would happen regardless of market conditions.  It was not done because of the gold market or any other market, but rather because CME Clearing always maintains a fully secured, committed line of credit with a consortium of domestic and international banks, which supports CME Clearing’s diverse collateral offering. Under the terms of the credit agreement, CME Clearing may use the proceeds of the credit line to provide temporary liquidity in the event of a default situation or other issue that would impact settlement between CME Clearing and clearing members.

New Treasury Note Futures Listed by CME Group

Q8: CME Group announced on May 4th that a new 3-year Treasury Note futures will be listed on July 13th. For the new T-Note product, CME will reduce contract's tick size to 1/8 of 1/32 for outrights and spreads; and increasing the 7-year T-Note with a remaining term between 2 years and 9 months to 3 years to form a more comprehensive basket of underlying asset for delivery.
Considering the Federal Reserve’s recent measures, what is the motivation for CME Group to launch a new 3-year Treasury-Note product? How will it affect the market?

Our enhanced 3-Year Treasury Note futures contract is designed to meet the evolving needs of today's treasury market participants particularly to meet client demand for an additional tenor point on short-end of the yield curve.

Since 2017, 2-Year and 5-Year Treasury Note futures open interest has rapidly grown in line with stronger end-user demand and this launch will offer our clients greater precision and seamless spread trading, which they are seeking amid increased fixed income volatility.

The reduction in tick size in the 3-year Treasury Note futures product builds upon the success of the 2-Year Note futures tick cut in January 2019 which improved cost-to-trade by up to 32% and attracted more end user participation. It also brings greater alignment between 2-Year and 3- Year Note Treasury futures.


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