The customization conundrum: Satisfying clients without hurting the bottom line

Introduction

Two decades ago, most corporate credit-investing strategies operated primarily by owning (or not) corporate bonds. Larger institutions utilized credit default swaps (CDS) to hedge default risk or gain synthetic exposure, but otherwise, bonds were it. Bonds were bought and sold via relationships and phone calls; systematic credit investing was rare, and systematic credit trading non-existent.

Fast forward 20 years: 44% of U.S. corporate bond volume trades electronically, up from nearly zero,¹ with dealers executing nearly one-third of orders with no human intervention.² Portfolio trades make up 10% or more of volume on any given day, credit ETF volume equates to 15–20% of the notional volume traded in the bond market, and systematic investing and trading is all the rage.

Despite this progress, a robust futures market—something taken for granted by interest-rate and equity traders—has, until recently, eluded the credit market. This is not for lack of trying. The first batch of new contracts launched in 2007 before the financial crisis hit its stride, with additional offerings coming after Dodd-Frank in 2012. Those contracts worked to mimic the CDS market, bringing CDS exposure into a futures framework under the assumption that new, more stringent oversight of the swaps market would drive traders elsewhere. That focus on converting swaps traders to futures and bringing futures traders into the credit market ultimately did not work.

The SEC’s Rule 6c-11 in 2019, which allowed ETFs to be created with or redeemed for a customizable subset of the bonds the ETF was tracking, unleashed huge market demand for trading and holding credit ETFs. In other words, rather than needing a fixed basket of individual bonds to create a new ETF share, a customized subset of that list, agreed upon by the issuer and the authorized participant, would now do.

The ETF create-redeem process, in turn, became a new tool for market makers. It helped corporate-bond electronic trading grow as market makers tapped ETFs to support their bond market-making operation, while systematic credit investors grew in number, following the increase in market transparency and access.

In 2018, Cboe launched its first credit future focused on the same index that the largest credit ETFs track (iBoxx iShares $ Investment Grade and High Yield Corporate Bond Indices), grasping onto the fast growth of ETFs as a trading vehicle and leaving behind the past generation’s focus on the swaps market.

Additional credit futures competition followed post-pandemic, first from Eurex, then CME Group and then ICE, with the new credit-trading market structure reiterating the potential benefits of credit futures for market participants. With 83% of our study participants aware of the products, market-wide open interest of U.S. contracts near $2.5 billion, and positive reviews from early adopters, credit futures growth in the months ahead seems inevitable. This research examines the sentiment, and current and expected future use of credit futures based on responses gathered from 41 credit investors in the U.S., U.K. and Europe.

Why credit futures?

Credit futures offer the same benefits market participants have come to love in futures tracking other asset classes, and some that are unique to credit markets. Unlike bonds and ETFs, some credit futures in the U.S. trade nearly 24 hours a day, five days a week. Using credit futures also comes with built-in leverage and capital efficiency, as margin requirements are considerably lower, at ~2–5%, than the 50% required via Reg T in equity markets (that govern ETF trading). In other words, less capital is required to gain the same exposure you would via ETFs or the bonds themselves.

Futures also offer an easy mechanism to short the bond indices they track, whether to hedge or to speculate— something that remains complex and expensive with other products. Bond ETFs can be sold short, but the cost of borrowing those shares can fluctuate dramatically and may be perceived as prohibitively high in times of market stress. One can technically borrow corporate bonds with a goal toward shorting them as well, but again, the cost and availability of those bonds make this approach unworkable.

Thinking more holistically and from an investment perspective, our study participants most often mentioned tactical asset allocation and overlay management as strong potential use cases for credit futures. For the former, futures offer an efficient way to quickly adjust overall exposure to the credit market, hedge existing positions or implement views on credit spreads. For instance, if an upcoming market event is expected to widen credit spreads, futures could be used to express that view in a way that would be difficult using bonds themselves. Cash management, mentioned by nearly one-third of our participants, presents a similar use case, with credit futures providing a mechanism to quickly put excess cash to work when sourcing and selecting the bonds needed may take time.

As a tool for overlay management, portfolio managers can adjust credit risk, enhance yield or otherwise optimize a portfolio without having to change their core holdings, all with the inherent benefits of credit futures outlined above.

Roadblocks to adoption

History has proven that widespread adoption of new futures contracts can take time. Futures contracts tracking everything from oil to volatility to the equity market have been launched into a skeptical market only to become a mainstay five or even 10 years later. As demonstrated by nearly half of our research participants who pointed to low product familiarity as the biggest obstacle to credit futures growth, increasing awareness on the trading desk is a critical element to success.

Familiarity also links closely with behavior change. Muscle memory can be hard to alter for portfolio managers who have spent an entire career investing only with bonds or using solely ETFs for overlay management. In that same vein, some of our participants believe that futures will not improve fund performance and/or are too expensive, emphasizing the need to model potential outcomes when futures are in the mix and then measure actual outcomes. Data that demonstrates the benefits of changing behavior is often what moves the needle. Tried and true is a common approach in investing, but standing out often requires doing something new.

Trading-technology support for credit futures ranked a distant second, which speaks to the near ubiquity of futures functionality in modern fixed-income order management systems. It is, however, possible that those currently trading and investing in only corporate bonds would not have futures trading functionality enabled or available, a technology challenge that is somewhat easy to remedy, depending on the OMS provider, via user-interface enhancements and new exchange connectivity.

Downstream processing and risk management can also require upgrades and education on the buy side. While neither the futures workflow nor the modeling of credit risk is new for most institutional investors, the combination of those two elements might be. The advent of swap futures over a decade ago caused similar operational concerns that were ultimately surmounted but required time and focus.

Liquidity concerns were only raised by 10% of our investor participants, a positive sign. Investors often note that it’s not about their ability to get into a position, but to get out when the time comes. So, while credit futures volume and open interest remain in a growth phase, the existence of brand-name market makers and the robustness of the underlying credit market have mitigated liquidity concerns that often plague new contracts.

An expanding ecosystem

The growing adoption of credit futures presents opportunities beyond the direct use cases we’ve presented thus far. Options trading in the credit market has grown notably in the past several years, as traders and portfolio managers look to speculate (directional trades), generate income and manage what has felt like constant market volatility.

While options on credit futures are barely in their infancy, they were cited as the credit-options product investors are most interested in trading. Swaptions (options on CDS) were most heavily used, which is not surprising, given our study participants are institutional investors, followed by options on ETFs, which now play a large role in implementing bond strategies. But the opportunity for credit futures stands out. Swaptions are traded OTC and, as such, need counterparty-specific documentation, and options on ETFs come with higher margin requirements and smaller trade sizes. Options on credit futures could prove to be a happy middle ground, offering both institutional exposure and the ease of exchange trading.

Opportunities also exist to expand the current suite of credit-futures products beyond their current broad investmentgrade, high-yield and emerging-market (EM) debt focus. Investors expressed interest in finer slices, whether for products focused on specific durations, sectors, credit ratings, or regions. An expansion into more narrow indices is already playing out on the ETF market, but credit futures can present more institutionally tailored solutions compared to the retail focus of most ETFs.

Conclusion

The credit market has undergone an incredible transformation over the past 15 years. A market that was once driven by phone calls and closely held prices is now driven by automated executions, systematic investing strategies and data so plentiful that market participants often struggle to make use of it all. This transformation has led not only to a bigger and more liquid market, but a market ecosystem that is considerably more diverse than ever. A more diverse market brings with it more diverse needs.

Previous attempts at credit futures targeted CDS traders and futures-focused firms, neither of whom were ultimately interested enough to help the market grow. The current batch of credit futures targets corporate bond investors, dealers and market makers, with products that track the same indices used in popular ETFs and as portfolio benchmarks. Hindsight being 20/20, the current approach, coupled with today’s market structure, leaves us hopeful that the credit market will finally get the futures product it deserves.

Kevin McPartland is the Head of Research for Market Structure & Technology at Crisil Coalition Greenwich.

¹https://www.greenwich.com/market-structure-technology/january-spotlight-us-corporate-bond-trading-2024-numbers

²https://www.greenwich.com/market-structure-technology/corporate-bond-dealers-focus-trade-automation

Methodology

Crisil Coalition Greenwich gathered 41 responses from credit investors in the U.S., U.K. and Europe in June 2025. Questions focused on the use of credit derivatives in the investing process, use of credit futures and future demand for credit-focused futures products.