MX redesigns 30-year bond futures

The Bourse de Montréal Inc. (MX) is proposing a series of changes to its futures contract on 30-year federal government bonds that it says will make it more useful for trading and hedging in the long-term bond market.

The derivatives exchange approved a series of proposed changes to the long-term government bond (LGB) contract, extending the delivery time, reducing the notional coupon rate, and revising the delivery standards. The proposals are now out for public comment.

“Management believes these amendments will enhance market efficiency, increase the contract’s utility as a trading and hedging instrument, and align the product with the successful design of other GoC bond futures contracts,” the MX said in a notice outlining the proposed changes.

Specifically, the exchange is proposing to move from a one-day delivery period to a one-month delivery; to reduce the coupon to 4% from 6%; and, to shrink the deliverable basket to a single benchmark bond.

These changes will “better reflect current market conditions,” it said — while also aligning the contract’s design with the futures contracts on two-, five-, and 10-year bonds.

The design of the current contract is considered “outdated and less efficient for basis trading,” the notice said.

And, the MX reported that the current contract suffers from limited trading activity and declining interest from traders.

The primary purpose of the proposed reforms is to increase its appeal to hedgers and speculators in the long-term bond futures market, it said.

“More specifically, the exchange believes that the proposed modifications will improve the optics of the LGB contract compared to the underlying cash market in terms of price, bid-ask spread and risks metrics,” the exchange said. “They will increase the effectiveness of the LGB contract for hedgers and speculators while building initial liquidity by reducing pricing uncertainty and increasing hedging flexibility.”

The proposed changes are the result of the exchange’s consultations with market participants.

“Market feedback consistently indicates that the product remains viable and that an active long-bond contract would significantly benefit the Canadian bond market. Consequently, the exchange is renewing its efforts to enhance the product through updated specifications derived from a comprehensive market survey and direct engagement with key stakeholders,” the MX said.

The proposed new specifications “are in line with market expectations, will encourage more transactions on the electronic market, and will provide a healthier balance of interests for participants by reducing risk and uncertainty,” the exchange said.

The proposed changes are out for comment until July 3.

If approved by regulators, the MX intends to adopt the new design in the third quarter.