Fixed income’s futures-based evolution: A benchmarking perspective

KEY TAKEAWAYS

Fateen Sharaby, Head of Index derivatives at Bloomberg Indices, explores the evolution of fixed income markets, as investors are increasingly using exchange-traded SOFR futures instead of traditional OTC swaps, in turn creating demand for new benchmarks that better reflect these tradable exposures.

Fixed income markets are undergoing a structural shift that is redefining how institutional investors access and express interest rate exposure.

For decades, that exposure has largely been implemented through over-the-counter (OTC) swaps, negotiated bilaterally with banks or cleared through established swap infrastructure. That market remains central to institutional rates trading. But today, the market continues to evolve, with more market participants accessing duration and curve exposure through exchange-listed, centrally cleared futures instruments that provide transparent pricing, standardised execution, and capital efficiencies. This evolution is not simply a change in trading venues. It is also changing the way participants think about implementation, transparency, operational efficiency, and benchmark design.

Nowhere is this more evident than in the rapid growth of SOFR-linked futures markets. Specifically, Eris SOFR swap futures have emerged as a key innovation, designed to deliver the economics of a swap within a futures wrapper. This provides market participants with a standardised, exchange-traded way to access SOFR curve exposure, without the operational and capital complexity of bilateral swaps.

This is crucial in today’s market, as liquidity in CME SOFR futures and Eris SOFR swap futures has expanded significantly in recent years, with demand for interest rate futures reaching record levels and continued growth in both outright and spread activity. In fact, data from the Bank for International Settlements and CME Group highlights a broader trend in which listed interest rate derivatives are gaining share relative to traditional OTC swaps, reflecting a market-wide preference for instruments that are centrally cleared, margin-efficient, and supported by transparent pricing.

This transition reflects a broader change in how institutions can access and manage rates exposure. With liquidity in SOFR-linked listed derivatives continuing to build, market participants now have more tools for expressing duration and curve views, complementing the traditional OTC swap market.

As a result, the underlying market structure is becoming more exchange-based, more transparent, and more globally accessible. For benchmark providers and index users, the implication is clear: as implementation choices broaden, measurement tools must also expand.

Measuring exposure through the tradable instrument

As fixed income implementation becomes more varied, benchmark design increasingly needs to reflect not only the market exposure being measured, but also the instrument through which that exposure is accessed.

Futures-based rates exposure is not the same as exposure delivered through a cash bond index or a conventional OTC swap. Its return profile depends on the underlying rate exposure, but also on contract selection, tenor targeting, roll timing, settlement conventions, collateral or cash return treatment, and the margin and cost dynamics inherent in futures-based implementation. That creates a need for transparent, rules-based tracker indices designed around the mechanics of the tradable instrument itself.

A futures tracker index can measure the performance of holding and rolling standardised futures contracts according to a stated methodology. In fixed income, that framework can be applied across government bond futures, credit futures, and swap futures, allowing different types of listed fixed income exposure to be measured in a consistent and repeatable way.

For SOFR swap futures, the objective is to create a systematic measurement framework for swap-equivalent exposure delivered through a listed futures contract. Rather than measuring only a generic point on the rate curve, the index must account for the mechanics that shape real-world implementation, including the selected contract, the targeted tenor, the roll schedule, the use of settlement prices and the methodology for maintaining exposure over time.

By embedding these elements into transparent, rules-based frameworks, futures-based indices can help translate tradable market exposures into repeatable benchmarks. They allow investors to benchmark performance, attribute risk, and evaluate exposures in a way that is aligned with how those exposures may be implemented in practice.

They also provide a common language for comparing and combining exposures across implementation routes. An investor may access duration or curve exposure through cash bonds, OTC swaps, Treasury futures, credit futures, SOFR swap futures or a combination of instruments. A consistent tracker-index framework can help users evaluate those exposures across futures, swaps, and credit markets within a unified methodology, while preserving the distinct mechanics of each instrument type.

The introduction of indices tracking SOFR swap futures extends this framework to listed swap-equivalent exposure, providing a transparent way to measure these markets through a rules-based, rolling methodology.

From benchmarks to building blocks

As these indices gain adoption, they are increasingly used not just as measurement tools but also as building blocks for portfolio construction. Futures-based rate benchmarks can serve as modular components within single- or multi-asset portfolios, enabling a range of use cases.

For rates investors, tenor-specific futures or swap-futures trackers can help represent different points along the curve. They can be used for duration overlays, allowing investors to adjust interest rate exposure without needing to trade the underlying bonds, as well as for curve expression strategies, such as implementing 2s10s or 5s30s positioning through tenor-specific indices. They can also be used for risk-balanced portfolios, where rate exposure is calibrated alongside equities, credit, or commodities, and for systematic or macro strategies that rely on liquid, rules-based futures exposure. In more defensive allocations, they can serve as tail-risk hedging tools, with long-duration sleeves acting as convexity proxies during risk-off environments.

In this context, the value of the index is not only that it measures a single market. It is that it provides a modular component that can be combined with other components under a consistent methodology.

For institutional investors, like sovereign wealth funds, central banks, asset managers, and structured product issuers, these indices provide a scalable and transparent way to incorporate rate exposure into broader investment frameworks.

A compliment to established fixed income benchmarks

The growth of futures-based exposures does not replace the need for traditional fixed income benchmarks. Broad bond indices, swap benchmarks, and curve measures remain foundational to asset allocation, performance measurement, and risk management.

The opportunity is additive. As market structure evolves, investors benefit from a broader benchmark toolkit: traditional benchmarks for broad market measurement, alongside tracker indices that reflect more targeted and implementation-oriented exposures.

That is especially relevant in rates markets, where futures-based tools are increasingly used for hedging, overlays, tactical allocation, and curve expression. When exposures are implemented through listed instruments, a futures-based benchmark can help align the measurement framework with the mechanics of the trade.

Aligning index design with market structure

Fixed income markets are becoming more transparent, more standardised, and more accessible through listed instruments. That transition is particularly visible in SOFR-linked futures and swap futures, where investors can access duration and curve exposure through centrally cleared contracts.

For index providers, the task is not to suggest that one instrument or benchmark type is superior to another. Rather, it is to provide measurement frameworks that reflect the range of tools investors use in practice. Indices are a core part of market infrastructure, shaping how investors understand performance, manage risk, and allocate capital. They are not just passive measurement tools.

As the fixed income toolkit expands, benchmarks can play an important role in connecting data, exposure, strategy, and implementation. Futures-based tracker indices are one part of that evolution: transparent, rules-based building blocks designed to measure exposures that are increasingly central to modern rates markets.

This article was written by Fateen Sharaby, Head of Index Derivatives at Bloomberg Indices and is reproduced from from Global Custodian.