The Lifecycle of Exchange-traded Derivatives Grant Cavanaugh Ph.D.

The research presented in this paper was co-authored by a Commodity Futures Trading Commission (CFTC) economist Michael Penick with co-author, Grant Cavanaugh, a former CFTC contractor who performed work under CFTC OCE contract (contract CFOCE-12-CO-0194). The analyses and conclusions expressed in this paper are those of the authors and do not reflect the views of other members of the Office of Chief Economist, other Commission staff, or the Commission itself. The CFTC’s economists produce original research on a broad range of topics relevant to the CFTC’s mandate to regulate commodity future markets, commodity options markets, and the expanded mandate to regulate the swaps markets pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. These papers are often presented at conferences and many of these papers are later published by peer-review and other scholarly outlets. This article provides a statistical description of the lifecycle of exchange-traded derivatives in the United States. Using annual volumes for most derivatives reported to US exchanges since 1954, we present distribu-tional estimates of the rate at which derivative trading volumes rise 1 and fall. Our results suggest that the lifecycle of cleared derivatives changed fundamentally in the 2000’s. In that decade, derivatives with low trading volumes moved to modest volumes with increased proba-bility. Prior to the 2000’s, low volume contracts were more likely to remain stuck at low volumes or be delisted altogether. This additional resilience from low levels of trading meant that the expected trading volume for a new cleared derivative after ten years of trading actually grew between the 1990s and 2000’s. This is surprising given that many new contracts were launched in the last decade and a historically large percentage of contracts traded at low volume in any year. The results suggest that trading volumes varied more decade to decade than from exchange to exchange or product type to product type