How Would An Interest Rate Hike Impact CME’s Interest Rate Derivatives Trading?

September 29th, 2016 by Trefis Team
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CME Group‘s (NASDAQ:CME) interest rate derivatives attract the greatest volumes among all asset classes traded on its exchanges. The exchange derives 85% of its revenues from trading, and about 27% from interest rate derivative trading alone. The company has seen mixed trends in volumes in the past two years. With interest rates expected to remain low until at least early 2017, the exchange’s interest rate derivative trading volumes are expected to remain largely flat through the end of this year.

 

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How Have Rates Affected Trading Volumes?

With improving macroeconomic conditions, it was initially expected that the Fed would increase interest rates (which had been around zero since 2008) in 2014. However, in spite of the unemployment rate going down, the hike did not happen throughout the year. This caused volatility in the derivative market to rise, consequently increasing interest rate derivative trading volumes. With the dollar strengthening and inflation at an all-time low of under 2% in 2015 and still no rate hikes, investors appeared to lose interest in the segment and trading volumes declined.

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A 25 basis point interest rate hike in December 2015 attracted a surge in trading volumes during the first two months of 2016. However, a slowdown in the Chinese economy likely weighed on trading volumes, leading to a decline in trading volumes post-February 2016. The Brexit vote caused a slight increase in trading activity during May and June, but the volatility caused by the news was short-lived, and July and August again saw a dip in volumes.

With subdued global economic growth and macroeconomic uncertainty expected to prevail in the near term, the next probable rate hike is expected in early 2017. Accordingly, we expect interest rate derivative trading volumes to remain suppressed for the rest of the year.

See the full Trefis analysis for CME Group.

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