Nasdaq offers a new & different interest rate future

July 3, 2018 08:37 AM
Nasdaq launches U.S. Treasury Futures product

Nasdaq (NDAQ) announced on July 2 that it will launch a suite of interest rate products— DV01 U.S. Treasury Futures — on the Nasdaq Futures Exchange (NFX) by later this month pending regulatory approval.  

The U.S. DV01 Futures will be cash settled On-The-Run U.S. Treasury futures contracts expressed as 100 minus the yield of the corresponding U.S. Treasury security, similar to the pricing of three-month Eurodollar interest rate futures. According to Nasdaq, the new futures will allow clients to hedge against the price sensitivity of a portfolio of cash market U.S. Treasuries across the yield curve from 2-year to 30-year maturities.

“The Clients of NFX, our futures exchange, which is predominantly power, had come back with feedback on other asset classes we should take a look at and one of the top ones was interest rates,” Ted Bragg, Head of NFI at Nasdaq, told Modern Trader magazine. “We know the Treasury is going to issue another $1 trillion in debt this year; not to forecast interest rates but we do know there is an additional product to come to market and [we want] to give participants an alternative [in] hedging.”

Bragg pointed out that the new futures will be complementary to their cash the U.S. Treasury platform, and the current environment makes the timing for this right. “We are getting additional issuances, we are getting additional volatility and we are getting a Federal Reserve that is stepping back from quantitative easing, so another hedging product would be convenient,” Bragg adds. 

“Combined with our experience in the U.S. Treasury cash markets on Nasdaq Fixed Income (NFI), the launch of U.S. DV01 Treasury Futures moves us closer to our goal of helping our clients gain greater certainty of their U.S. Treasury portfolio interest rate risk,”  Bragg said in a statement. “The U.S. Treasury market needs additional instruments to help manage interest rate risk, and U.S. DV01 Futures provides increased optionality and alternative fast-growing interest rate futures market.” 

As the deepest and most liquid government securities market in the world, the U.S. Treasury market is highly reliant on and influenced by an array of economic factors.  Futures market participants will benefit from U.S. DV01 Treasury Futures through the following:

•                U.S. DV01 Futures will be cleared by The Options Clearing Corporation (OCC), and allow clients to hedge against the price sensitivity of a portfolio of 2-year, 5-year and 10-year notes, or 30-year bonds.

•                U.S. DV01 Futures are cash settled On-The-Run U.S. Treasury futures contracts expressed as 100 minus the yield of the corresponding U.S. Treasury security. 

o               Example:  A 10-year note yield of 3.065 percent shall be expressed as a futures yield-derived price of 96.935.

•                The underlying interest is the dollar value (“DV01”), assigned by the Exchange at the time of listing for each contract month, of a one basis point change in yield of the current On-The-Run U.S. Treasury security, with a face value of one million dollars having fixed semi-annual coupon payments available for trading on the NFI Alternative Trading System Order Book (the “NFI Order Book”). 

o               Example:  A 10-year note DV01 designated by the Exchange of $850 will result in a minimum trading increment of one-tenth of one basis point (0.001) which equals $85.00.

•                Trading in U.S. DV01 Treasury Futures contracts will be Sunday through Friday, 7:00 PM – 6 PM EPT. 

NFI is the second largest dealer-to-dealer institutional trading venue for U.S. Treasury securities. The six On-The-Run U.S. Treasury securities are among the highest in volume and the most liquid financial instruments in the world, according to the company. The U.S. Treasuries cash marketplace is extremely efficient -- there are over a dozen multi-billion dollar principal trading firms whose core strategy is to transfer liquidity between U.S. Treasury trading venues at ultra-high speeds. In 2018, The Nasdaq Fixed Income trading platform will move to Nasdaq’s state-of-the-art matching engine, business functionality and protocol technologies – the Nasdaq Financial Framework.  

Nasdaq offers an electronic trading platform for cash U.S. Treasury securities, providing real-time, intraday, end-of-day, historical and indicative data formats for U.S. Treasury data. Treasury securities include Treasury bonds (T-bonds), Treasury notes (T-notes) and Treasury bills (T-bills) and U.S. Treasury Floating Rate Notes.

To learn more about Nasdaq’s DV01 and the specifications, please clicker here: Treasury Futures, please visit here.



About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.