CHICAGO, April 25, 2012 /PRNewswire/ --The CBOE Futures Exchange, LLC (CFE) and DRW Trading Group have completed an agreement that will allow CFE to use DRW's patent-pending methodology to create variance futures that, for the first time, match the quoting conventions and economic performance of over-the-counter (OTC) stock index variance swaps.
CFE plans to introduce a new futures contract based on the variance of the S&P 500® (SPX) later this year, subject to regulatory approval.
Variance swaps measure the difference between the expected and actual variance of an underlying instrument over a fixed time period. Currently, variance swaps on the S&P 500 index are estimated to trade $10 million vega notional per day in the OTC market. Vega is the dollar exposure to changes in volatility.
"We are thrilled to work with DRW to create a variance futures offering for OTC users and for traders who traditionally have not participated in the OTC variance swap market," CBOE President and COO Edward T. Tilly said. "CFE's ability to offer products that combine the conventions of OTC variance swaps with the benefits of exchange-traded futures – transparency, price discovery, certainty of execution and protection against counterparty risk through the OCC – will offer significant benefits for both groups."
"As a firm with a strong presence in both exchange and OTC markets, we envision both sides benefiting from cleared variance futures," said Donald R. Wilson, founder and CEO of DRW Trading Group. "Access to variance swaps has typically been limited to the large OTC broker-dealers. By creating an economically equivalent futures-style contract, more market participants will have another avenue to mitigate volatility risk exposure. In addition, with more players in the market, both groups can benefit from an increase in market liquidity."
CFE currently offers futures on eight different contracts, including: the CBOE Volatility Index (the VIX Index), the CBOE Mini-VIX (VM), the CBOE Gold ETF Volatility Index (GVZ), CBOE S&P 500 3-Month Variance (VT), the CBOE Emerging Markets ETF Volatility Index (VXEM), the CBOE Brazil ETF Volatility Index (VXEW), the CBOE Crude Oil ETF Volatility Index (OVX) and the Radar Logic 25-Metropolitan Statistical Area (MSA) RPX Composite Index (RPXCP). CFE also offers Weekly Options on VM futures (VOW).
CFE, a wholly-owned subsidiary of CBOE Holdings, Inc. (NASDAQ: CBOE), offers an all-electronic, open-access market model, with traders providing liquidity and making markets. CFE is regulated by the Commodity Futures Trading Commission (CFTC) and all trades are cleared by the OCC. More information on CFE and its products, including contract specifications, can be found at: http://cfe.cboe.com/.
About DRW Trading Group
DRW is a principle trading organization that trades across a wide range of asset classes, including futures, options on futures, fixed income securities and equity securities and options. DRW is headquartered in Chicago and has offices in New York and London. More information on DRW can be found at www.drwtrading.com.
CBOE®, Chicago Board Options Exchange®, CFE®, CBOE Volatility Index® and VIX® are registered trademarks, and CBOE Futures Exchange(SM), GVZ(SM), VM(SM), VT(SM), VOW(SM), VXEM(SM), VXEW(SM) and Weeklys(SM) are servicemarks of Chicago Board Options Exchange, Incorporated (CBOE). Standard & Poor's®, S&P® and S&P 500® are registered trademarks of Standard & Poor's Financial Services, LLC, and have been licensed for use by CBOE and CFE. Russell 2000® is a registered trademark of the Frank Russell Company, used under license. The Nasdaq-100 Index®, Nasdaq-100®, and Nasdaq® are trademark or service marks of The Nasdaq Stock Market, Inc. (with which its affiliates are the "Corporations"). These marks are licensed for use by CBOE in connection with the trading of products based on the Nasdaq-100 Index. The products have not been passed on by the Corporations as to their legality or suitability. The products are not issued, endorsed, sold or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO THE PRODUCT(S). All other trademarks and servicemarks are the property of their respective owners.