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Treasury note futures basic information for investors

Treasury note futures basic information for investors. Jarosław Ziębiec Head of Derivatives WSE June 2005. T-note futures:applications Benefits of trading T-note futures at the WSE WSE new members – polish banks T-note futures basic information Conversion factor Position limits

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Treasury note futures basic information for investors

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  1. Treasury note futures basic information for investors Jarosław Ziębiec Head of Derivatives WSE June 2005

  2. T-note futures:applications Benefits of trading T-note futures at the WSE WSE new members – polish banks T-note futures basic information Conversion factor Position limits Settlement and delivery More information Contact details Agenda

  3. Hedging of treasury bonds basket for banks, investment funds And soon for open pension funds Speculation Arbitrage opportunities Spread trading Asset allocation Treasury note futures: applications

  4. No ISDA agreement required Easier to close futures position No offsetting trades remain on books No costly unwinds High-quality counterparty credit exposure (NDS as a cleraing house) Easy to track P/L Benefits for trading T note futures at the WSE

  5. Since may 2004 polish banks are allow to become direct WSE members Banks can do proprietary trading at the WSE: Trasury note futures, trasury bonds All futures and options contract Banks are trading via Treasury Dept. Currenty (June 2005) 5 banks are trading T-note futures: BPH, PEKAO, PKO BP, Millennium, ING Benefits for banks: Small costs New opportunity WSE new members - polish banks

  6. Launch date Feb 14 2005 first derivative based on interest rates - bonds first derivative with delivery Instrument created with cooperation of polish banks Hipothetical treasury note with coupon 6% p.a. Treasury note futures at the WSE

  7. Contract basic information

  8. Contract basic information

  9. Contract basic information

  10. Basic info – „ Trading rules for T-note futures…” Detailed Exchange Trading Rules WSE Rules All documents can be found at the WSE web site Trading Via WSE brokerage house Becoming WSE member How to trade T note futures ?

  11. Trading

  12. Maximum order volume – 500 contracts Daily price limits - +/- 1,5 percentage points (150 basis points) from the reference price Initial margin = 2,8% of the contract value Manintenance margin = 2% Daily market-to-market by NDS Fees – no WSE fees for members until 31.12.2005 Liquidity supported by 5 market makers Trading

  13. Banks: BPH, ING, PKO BP, PEKAO SA Brokerage house : CDM PEKAO SA Minimum offer size – 100 contracts (bid/offer) Maximum bid/offer spread – 30 basis point i.e. 100,00 – 100,30 Mm quoting during 5 hours of the session, Mm are present at opening and closing Answering RFQ (request for quotes) Market makers

  14. Clearing member position limit – for clearing member maximum of 7,500 open short and long positions for all series of note futures contracts. The position limit includes all open positions within a clearing member, both on their own and on their clients’ accounts. NIK position limit (investor account) maximum of 7,500 open short and long positions for all series of note futures contracts. If the investor has accounts with several clearing members, how much of the limit was used is determined on the basis of the sum total of open positions on those accounts. Position limits

  15. where: r – interest rate used to determine a conversion factor, equal to 6% p.a. n – number of years left until maturity of a security after a coupon payment date following the delivery date. If the day of granting the right to interest falls between day T and day T+3 (where T is the last trading day for a contract series) or earlier and the coupon is paid after the delivery settlement date, it is disregarded when “n” is determined. C – annual coupon per PLN 100 of the par value of notes. If the day of granting the right to interest on notes falls between day T and day T+3, this payment is disregarded. y – current number of days between two annual interest payment dates, taking the delivery date into account (both 365 and 366 days). d – current number of days between the delivery settlement date (T+4) and interest (coupon) payment date following the delivery date. PV – present value of each PLN 100 of the par value of notes, discounted at rate r as at the coupon payment date. Conversion factor

  16. Determined by NDS for each T bond which could be delivered for given contract Determined for 100 PLN of nominal value known before trading of each T note series -published by NDS and WSE Conversion factor

  17. Examples of conversion factors

  18. Delivery with bonds Last trading date – T (Friday) Delivery date – T+4 In exceptional case NDS may settle part of open position in cash - if market position limit is exceeded market position limit - a limit is established for the value of all open positions for a series of note futures contracts on the last trading day: 20% of the value of notes in the basket. Settlement

  19. Bonds fixed interest treasury notes issued by the Minister of Finance, with a minimum issue value of PLN 5 billion remaining maturity of not less than 2 years and 9 months and not more than 5 years and 6 months as of the futures contract delivery date NDS and WSE select bonds which could be delivered and publish ”list of deliverable bonds” Currently (June 2005) list of deliverable bonds for contract FPS5Z05 include: DS0509, PS0310, DS1110. List of deliverable bonds

  20. Final settlement value of notes • The value is counted and published by the NDS • The final settlement value of notes is determined for each series of deliverable notes on the basis of the final settlement price of a contract and an applicable conversion factor for a note series. The final settlement value is given accurate to one grosz. The final settlement value of notes for a series is computed in accordance with the following formula: where • OCRi – final settlement value of notes for the ith series (series No. i), • CFi – conversion factor for the ith series of notes, • OKR – final settlement price of a contract, • AIi – product of accrued interest on the ith series of notes and 100. If the day of granting the right to interest falls between T and T+3 (where T is the last trading day for a contract series) or earlier, this interest is disregarded.

  21. Example of calculation – final settlement value for bond

  22. Very young market turnover – over 13 thousand contracts Average daily turover – around 200 contracts No of open position (May 30. 2005) – 1672 contracts Both series are active Banks which conclude trades – 5 Brokers which conclude trades – 6 Summary of trading Feb 14 – May 30 2005

  23. WSE web site: http://www.gpw.com.pl/gpw_e.asp?cel=e_papiery&k=237&n=23&i=/derivatives/futures_contracts/treasury_fut „Trading rules for T-note futures”, Information about CF, list of deliverable bonds, Trading calendar, Margin, On-line quotation, Other marketing information, Please contact your local polish broker for details More information

  24. If you hany any questions please contact: Jarosław Ziębiec Head of Derivatives Section Market Operations and Development Warsaw Stock Exchange phone +48 22 537 73 89 mobile +48 605 470 651 e-mail: jaroslaw.ziebiec@gpw.com.pl or futures@gpw.com.pl

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