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Introduction
Australian Treasury bond futures are interest rate
derivatives traded on the ASX 24 market. Treasury
bond futures contracts in Australia differ from
government bond futures contracts in most other
countries in that they are not settled at contract
expiry by the delivery of a security, but rather are
settled in cash. The settlement amount is based on
the average price of a basket of CGS on the expiry
date of the futures contract. Since they are highly
liquid products that trade anonymously on an
exchange, Treasury bond futures are widely used by
investors to hedge interest rate risk or gain interest
rate exposure. However, many participants replace
this initial interest rate exposure with a position in a
physical asset, such as CGS or another bond, through
exchange for physicals(EFP) trading. In an EFP trade
involving a bond, one party buys the bond and sells
an offsetting position in futures contracts referencing
that asset to the same counterparty.
B u l l e tin | s e p t e m b e r Q ua r t e r 2 0 1 4
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Tr a di ng i n Tr ea s ury B o n d F ut ur e s Co n t r ac t s an d Bo n ds in Au stral ia
3 and 10 years
Contract unit
Face value of $100 000 with a coupon of 6per cent per annum
Contract months
Reference basket
Specified by ASX
Settlement price
The price of a bond paying a 6 per cent annual coupon with a yield
corresponding to the average yield of the underlying reference bonds
Settlement day
Settlement method
Maximum number of
open positions at expiry
Source: ASX
Graph 1
$b
$b
300
300
250
250
200
200
150
150
100
100
50
50
0
1994
Source:
48
1998
2002
2006
AOFM
R es erv e ba nk of Aus t r a l i a
2010
0
2014
bps
Physical delivery
10-year
Japanese government
bond futures
Physical delivery
Euro-Bund futures
Physical delivery
UK Gilt futures
Physical delivery
Australian Treasury
bond futures
Graph 2
Australian 3-year and 10-year Net Basis
3-year
Cash settlement
-1
65
-1
40
25
Business days to expiry
10
B u l l e tin | s e p t e m b e r Q ua r t e r 2 0 1 4
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Tr a di ng i n Tr ea s ury B o n d F ut ur e s Co n t r ac t s an d Bo n ds in Au stral ia
50
Graph 3
EFP Trading
3-year
20
20
15
15
10
10
10-year
2006
Source:
2008
2010
2012
2014
ASX
3 For the full list of physical assets that can be traded against bond
futures in an EFP trade, see ASX 24 Notice No 202/13, available at
<http://www.sfe.com.au/content/notices/2013/notice2013_202.pdf>.
5 A single trading participant can be the broker for both sides of the EFP
transaction.
R es erv e ba nk of Aus t r a l i a
B u l l e tin | s e p t e m b e r Q ua r t e r 2 0 1 4
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Tr a di ng i n Tr ea s ury B o n d F ut ur e s Co n t r ac t s an d Bo n ds in Au stral ia
Conclusion
Well-functioning interest rate futures markets are
beneficial for financial markets and the economy
more generally as they facilitate the pricing of other
financial instruments and the hedging of interest rate
risk exposures. The characteristics of the Australian
Treasury bond futures contracts are designed to deal
with the relatively small size of the physical market
for CGS. Treasury bond futures are widely used
because they provide financial market participants
with a relatively easy and cost-effective means of
managing interest rate risk. EFP trading has evolved
to deal with some of the idiosyncrasies of Australias
bond futures contracts, and it is commonly used by
a broad range of market participants. R
References
ASX (Australian Stock Exchange) (2013), ASX 3 and
10 Year Treasury Bonds Futures and Options. Available at
<http://www.asx.com.au/documents/products/3-and-10year-treasury-bond-futures-factsheet.pdf>.
ASX (2014a), ASX Notice No 0998.14.09 Implementation
of ASX 24 Bond Futures Expiry Price Process, September.
Available at <http://www.sfe.com.au/content/notices/2014
/0998.14.09.pdf>.
ASX (2014b), ASX 24 Notice No 008/14 Increase to
ASX 3 and 10 year Treasury Bond Futures Position Limits,
March. Available at <http://www.sfe.com.au/content/
notices/2014/notice2014_008.pdf >.
Lien B and A Zurawski (2012), Liquidity in the Australian
Treasury Bond Futures Market, RBA Bulletin, June, pp 4958.
Effect of 1 basis
point change
in yield on price
1 February 2018
107.13
$10 million
$3 683
3 years
97.00
123 contracts
$3 683
Trade
Maturity
Bond
Sell
6.00
Futures
Buy
6.00
Security
Source: RBA
52
Price
Face value/
contracts
Coupon
Per cent
R es erv e ba nk of Aus t r a l i a