RIVET™ Methodology

The RIVET™ methodology makes it possible for a standardized, centrally cleared future to match the characteristics of a spot starting OTC variance swap. How?

Cash Flow Equivalency

Aligns the difference in cash flows between collateral posted against OTC trades and margin collected in the listed market

Strike Compression

Realized returns of the contract are factored in, but all you see is the remaining implied component of the contract

Developed to Solve Market Problems

The RIVET methodology was developed in 2012 to offer an alternative for trading or hedging volatility. Variance swaps traded over-the-counter hold many benefits, but investors also face challenges when trading in this market—RIVET-backed products overcome these challenges:

  • Access constraints: documentation needed to trade in the OTC variance swap market can be a barrier
  • Lack of transparency: market isn’t visible for price discovery and risk management
  • Lack of liquidity: less access to the market means fewer participants providing liquidity
  • Counterparty risk: assumed by market participants in OTC trades
  • Delay in execution: seeking a collective market and verbal confirmations creates a lag

Created to Align Economics of OTC Variance Swaps

Previous attempts to list variance swap contracts haven’t delivered. None of them traded like the OTC market—a different model was needed to evaluate them, cash flows were different due to margin requirements, and spot starting wasn’t possible.

The objective behind the RIVET methodology is to replicate the economics of an OTC variance swap. Not unlike trades in the OTC market, trading and clearing in different notations involves a conversion process: vega converts to futures and volatility strikes convert to future prices. The result is a listed futures product that looks like an OTC variance swap and a transaction that feels like you’re trading in the OTC market, with the benefits of a centrally-cleared, standardized contract.

Built with Deep Industry Expertise

As a participant in the variance swaps market, principal trading firm DRW saw the same problems facing others and sought an alternative. This led the firm, with a 25-year history in the industry, to develop and patent the RIVET methodology underlying the futures products licensed by and listed on CFE and Eurex exchanges.