What is the connection and difference between futures and swaps?
First, the degree of standardization is different.
1 futures contract standardization.
The object of futures trading is the standardized futures contract formulated by the futures exchange. The contract terms such as variety, quantity, quality, grade, delivery time and delivery place are all valid, and the only variable is the price. There is no need for both parties to discuss the terms of the contract.
The exchange is not standardized and should be negotiated by both parties.
The object of swap transaction is a non-standardized contract reached by both parties through private consultation. The subject matter of the contract and its quantity, quality and grade are determined by both parties through consultation and are personalized. Different swaps differ in the quantity and quality of the subject matter.
Second, the trading methods are different.
1 Futures trading is brokered by the system.
Futures trading is conducted in the open market organized by the futures exchange through the electronic trading system, and the trading price is open and authoritative.
Exchange is mainly carried out by manual inquiry.
Swap trading generally has no fixed trading place and trading time, and can be conducted between dealers in the inter-bank market or OTC market, or directly with end customers, mainly through manual inquiry.
Third, the relationship between the two parties to the contract is different.
1 The futures clearing institution acts as the counterparty of the futures trading contract.
The performance of futures trading contracts depends on the futures clearing house, which, as the central opponent in futures trading, will become the seller of all buyers and the buyer of all sellers, which means that both parties only need to complete the transaction in the futures exchange, and the market information cost is very low.
2 one-to-one exchange protocol
The swap agreement is directly signed by both parties to the transaction, and it is one-to-one. The default risk of swap mainly depends on the credit of the counterparty.
From the above point of view, standardized futures trading is obviously more convenient, without negotiation, with relatively low cost, and the risk is relatively small because of the role of futures clearing institutions as central counterparties.