Risk-based futures

Financial Fiction Episode 3: Risk-based futures



For linear interest rate derivatives, risk and DV01 are considered as very similar expressions.

This is also what we can deduce from the name of the latest new futures launch by NASDAQ.

Some five years ago, I proposed a new design for interest rate futures that I called risk-based futures. I worked with ASX in 2014 to adapt the design for the AUD market. At the end of 2015, ASX launched a swap futures based on that design. The ASX product has an extra feature of having a variable tick value, but the central feature of the design is the same: a futures price representing a rate or yield and the physical delivery of an ATM trade on the futures expiry.

NASDAQ will be launching soon its DV01 Treasury Futures. According to NASDAQ, the new product will be available for trading on Thursday, July 19, 2018, pending regulatory approval.

The name "risk-based futures"(1) has been changed to "DV01 futures", but the central idea is the same: future style margin on the price multiplied by a conventional DV01/PVBP and physical settlement at expiry into an at-the-money trade.

In my generic design the delivery mechanism can take several variants. NASDAQ has selected the simplest one where the notional of the delivered trade is fixed in advance. This create a jump in risk at delivery. The risk jumps from the futures term-sheet DV01 (e.g. 850 USD by basis point for the U.S.10-yr DV01 Treasury futures) to the actual DV01 of the delivered instrument. The variant is to deliver at expiry a trade with a notional adapted to smooth the risk.

The design of the futures I proposed is very versatile. As mentioned above, ASX has proposed a version; the underlying is a BBSW swap. The NASDAQ is now proposing a version with US Treasury underlying. I have proposed a version for the overnight-indexed market. The overnight-linked market is expected to become more important with the increased importance of SOFR, SONIA and probably a new EUR overnight benchmark. I will publish the details of the OIS based version in the coming weeks.

Another financial fiction becoming reality! See Financial Fiction 1 and Financial Fiction 2.


(1) I used that name at the The 3rd Interest Rate Conference (London, UK) in March 2015 in a presentation with the title Deliverable Swap Futures: a risk-based design.

Added: The design of the OIS based future is available in the post Risk-based overnight-linked futures - innovative design.

Comments

Post a Comment

Popular posts from this blog

Multi-curve framework book: new edition in progress

Image
Subject: Interest Rate Modelling in the Multi-curve Framework: Foundations, Evolution, and Implementation It has been more than 10 years since I wrote the first edition of the multi-curve framework book. What happened in those 10 years? Why did it take me so long to start a new version? It took me roughly 10 years to write the first edition. The reason it took so long at that time, was that I did not know that I was writing it! I thought I was writing a couple of pages on an obscured and theoretical idea that there was not a `` one curve to rule them all '' but multiple curves. It turned out that it became the actual practice for very clear and important reasons. That was the excuse for the first edition, what is the excuse for the second edition? Since the first edition, many things happen, in particular: March 2015: BCBS - IOSCO: margin requirements for non-centrally cleared derivatives and mandatory variation margin July 2017: The future of LIBOR -- actually it
Read more

Rigged: part 1 - Will there be a part 2?

Image
I have been reading book “Rigged: The Incredible True Story of the Whistleblowers Jailed after Exposing the Rotten Heart of the Financial” (Andy Verity, Flint, June 2023) for some time. It was published several month ago, but I just finished it. To my defence, I have to say that I don’t feel comfortable reading fiction where the “bad guys” are systematically winning by cheating. The book is the story of the miscarriage of justice done in the LIBOR manipulation story. The book content did not surprise me. For anybody having worked on a (swap) trading desk, it is clear that what was described by the accusation was impossible. It is not possible for some middle level trader to create a multi-year, multi-desk, multi-bank international conspiracy over open lines, broker lines, on open offices etc. without all around them, including compliance and senior management to be fully aware of what is going on. Moreover the regulators cannot be ignorant of the situation, except pleading complete in
Read more

A personal statement on the IOSCO Statement on Alternatives to USD Libor

IOSCO has issued a document called “Principles for Financial Benchmarks” in 2013. As such it acted as an (unofficial/unelected) lawmaker. On 3 July 2023, the same IOSCO issued a “ Statement on Alternatives to USD Libor ”. The Statement looks like a tribunal judgement from a trial with no public hearing, no witness, and no defense right from a tribunal with no mandate to judge. And publish on the day before Independence Day! Some personal comments on the document. Transparency The statement indicated “Administrators should consider whether to improve the transparency of their rates". The IOSCO document lack minimum transparency. It does not indicate in any way the “varying degrees of vulnerability of concern“ of the analysed benchmarks. The name of the benchmark are not even indicated. This creates a culpability by association to all non-SOFR benchmarks. The statement refers to a Review of Alternatives to USD Libor ; to my knowledge, the review itself is not available. The st
Read more