The Chicago Board Options Exchange (CBOE) has announced that it will begin disseminating values for its first interest rate-based volatility index, the CBOE Interest Rate Volatility Index (SRVX), on Monday 18 June. The SRVX Index is designed to offer fixed income investors a standardised and transparent measure of interest rate swap volatility.
CBOE’s Interest Rate Volatility Index measures expected basis-point volatility in the interest rate swap market. Specifically, the index is based on one-year/ten-year US dollar-denominated swap options (swaptions), which are one of the most actively traded contracts in the $14.5 trillion notional over-the-counter (OTC) US dollar interest rate option market.
“The CBOE Interest Rate Volatility Index extends the same benefits provided by our widely followed equity index volatility benchmarks to customers in the enormous fixed income market,” said CBOE Chairman and CEO William J. Brodsky. “Interest rate swaps and swaptions together are the most actively traded derivatives in the OTC market, and we believe the CBOE Interest Rate Volatility Index will enable participants to more efficiently assess risk in this enormous asset class.”
The SRVX Index is calculated using data provided by major interdealer brokers in the swaption market, applied to a formula similar to the methodology for the CBOE Volatility Index (the VIX Index). CBOE initially will disseminate the SRVX Index value once a day after 3 pm (US) Central Time.
CBOE currently publishes data on more than two dozen volatility-related benchmarks and strategies. The CBOE’s Volatility Index (VIX), which measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices, has, since its introduction in 1993, become the world’s foremost barometer of investor sentiment and market volatility.
The index has also become the basis for a large number of ETFs and ETNs providing exposure to equity volatility, such as the iPath S&P 500 VIX Short Term Futures ETN (VXX), which has some $1.8 billion in assets. The launch of the CBOE Interest Rate Volatility Index will likely be the precursor for similar such ETFs/ETNs based on interest rate volatility.
Perhaps the closest thing to such an ETF currently available is the Xetra-listed DB X-trackers Euro Interest Rates Volatility TR Index ETF (XVOL), which tracks the Euro Interest Rates Volatility TR Index, and its inverse sibling, the DB X-trackers Euro Interest Rates Volatility Short Daily TR Index ETF (XVLS).
The objective of XVOL is to generate returns (which may be positive or negative) from any increase in the implied volatility of euro interest rates over time. The underlying index relates to the economic performance during each quarterly period of a notional long position in the relevant DVOLX EUR Forward Contract, leveraged by a factor of 20, and in the Deutsche Bank EONIA Total Return Index entered into at the start of such quarterly period. DVOLX represents the weighted-average implied volatility of certain Euro swaptions. Both ETFs have a TER of 0.25% and are aimed at sophisticated professional investors.