INTERVIEW-Banks could be obliged to set Libor rates
* Alternatives to Libor to be found for some contracts
* Associate membership sells for highest price since August
* Treasury futures, options volume increases
* Seat buyers betting any Fed changes will boost volatility
By Tom Polansek and Ann Saphir
CHICAGO/SAN FRANCISCO, April 19 Trading firms are snapping up memberships at the Chicago Board of Trade as signs that Federal Reserve policymakers may pare back their massive monetary stimulus boost Treasury futures trading.
CBOT seats that give the right to trade Treasury futures at the cheapest rates have jumped 30 percent in price since the beginning of the year, with one fetching $100,000 on Thursday in the private seat market that CME Group runs for members of each of its five futures exchanges, including CBOT.
That is the highest price for associate memberships since last August, just before Fed Chairman Ben Bernanke signaled the central bank was considering a third round of so-called quantitative easing aimed at pushing down long-term borrowing rates to encourage spending and hiring.
The Fed began buying Treasuries and housing-backed bonds the following month, and activity in Treasury futures sank as traders saw less need to bet on or hedge against changes in borrowing costs for five, 10, or more years ahead.
With the economy picking up speed and some Fed policymakers suggesting the central bank could begin cutting back on its purchases by this summer, trading in Treasury futures and options is up again.
The rise in volume has helped boost the price of CBOT seats, which give the holder the right to stand in the exchange's open-outcry trading pits as well as providing a deep discount on trading costs.
A CME spokesman declined to comment on seat prices.
There are five levels of individual CBOT memberships, with each allowing holders to trade certain products at reduced rates and to gain access to open-outcry trading.
Full memberships are the most expensive, selling for almost $300,000, and give the right to trade all CBOT financial and agricultural contracts.
Associate memberships are the next level down and allow owners to pay just 5 cents per trade for Treasury futures and options, compared with as much as 50 cents for non-members trading futures and 75 cents for non-members trading options.
Seatholders can use their memberships to trade by open outcry or electronically, and can also rent them to others, pocketing a monthly lease that has been on the rise.
CBOT associate memberships are in demand because traders project Treasuries could become "the best trade going" if the central bank slows its bond purchases, said Tim Zaug, a founding partner of Chicago trading firm AlphaBit Trading.
"Not only is it the best-paying (lease) right now, you also have this upside call of a high interest rate environment," he said about associate memberships.
Associate memberships lease for $733 a month, or about 0.7 percent of the latest sales price, according to CME data.
By comparison, memberships that allow holders to trade futures and options in short-term interest rates and currencies at the Chicago Mercantile Exchange are leasing for about 0.4 percent of the latest sales price of $190,000.
QE3 END IN SIGHT?
To be sure, the prices for seats at both exchanges are well below their highs of 2007 - $400,000 for financial futures trading memberships at the CBOT and $955,000 at the CME. The Great Recession and the Fed's near-zero interest-rate policy put a dent in interest-rate futures trading which hurt seat prices.
The Federal Reserve is now buying $85 billion in Treasuries and mortgage-backed securities a month. Bernanke has pledged to keep up the massive purchases, known as quantitative easing, until the labor market outlook improves substantially.
Some policymakers expect that milestone to be reached within months. Others do not expect it until the end of the year.
Once the Fed does begin to cut back on its bond buying, long-term borrowing costs could rise. The return of volatility would be a boon to Treasury futures trading.
"Everyone is continually trying to anticipate if and when the Fed stops quantitative easing," said Doug Warner, a broker for Grant Park Securities in Chicago and a 25-year veteran of rate-futures trading.
Futures exchanges would welcome the change as their profits have suffered from declining trading volumes, which CME's executive chairman in October called a "disaster."
CME Group's Chief Economist Blu Putnam predicted an end to the Fed's super-easy monetary policy would spark volatility in Treasuries, according to a video posted on CME's website on Thursday.
TRADING PERKS UP
Activity is picking up already. In the first three months of the year, trading in 10-year Treasury note futures - the most active contracts at the Chicago Board of Trade - rose 18 percent from the same period a year earlier, to 82.9 million contracts.
Trading in 10-year note options rose 36 percent to 19.9 million contracts.
Meanwhile, traders are less excited by futures on short-term rates.
The Fed has vowed to keep rates near zero until unemployment, now at 7.6 percent, drops to at least 6.5 percent - a threshold most Fed policymakers do not see the economy reaching until well into 2015.
With rates unlikely to rise for another two years, trading in Eurodollar futures - used to bet on interest rates for a few months to a few years into the future - has plummeted.
Trading in CME's Eurodollar futures fell 12.5 percent in the first three months of the year. Trading in Eurodollar options fell 52 percent.
"People know what the game plan is for the Fed in the short term, which is nothing," said Zaug, whose firm paid $90,000 for one seat in January and is using three new memberships to expand its team of traders. "People don't necessarily know what the game plan is farther away from that."
Uncertainty about the future encourages trading and the expectation that prices will continue to rise for CBOT associate seats, identified by maroon-colored badges in open-outcry Treasury-futures trading pits.
Carter Glass, who trades treasuries and grains electronically for a proprietary trading firm, bought an associate membership for $93,000 last month.
Glass said his clearing firm helped him quickly lease out the membership.
He said he can end the lease and use it to trade for himself "at the lowest possible rate" if he ever decides to leave the firm or if membership prices unexpectedly tumble.
"For me, it was a no-brainer to buy one," he said. "Eventually, when interest rates tick back up and volume comes back into the Treasuries, seats could quickly trade back to $130,000." (editing by Jim Marshall)
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