Tiffe to launch long-term interest rate futures

The Tokyo International Financial Futures Exchange (Tiffe) plans to launch long-term interest rate futures by May, despite a fall-off in interest for the exchange's short-term rates contracts.

There was a sharp fall in traded volumes of short-term interest rate products last year, primarily due to the Bank of Japan’s zero interest rate policy. This has reduced much of the need to hedge short-term interest rate risk.

“There’s absolutely no risk in the rates, so one can be fairly lazy about bothering to risk-manage very short-term positions,” said one trader at an international bank in Tokyo. “The rates are very stable and never move, so there’s no real necessity to cross any bid-offer spreads to remove risk.”

An official at the exchange said it made good business sense to enter the long-term interest rate market. “In financial year 2002, trading wasn’t that active. I suppose that is because financial monetary policy isn’t that volatile right now. So in that sense, going into the long-term market seems a good idea for us,”said the official.

The official added that the decision to launch the new long-term interest rate swap futures contract was made as implementation of new trading and clearing systems nears completion at Tiffe. Developed by the London International Financial Futures and Options Exchange (Liffe), the Liffe Connect system will be able to handle complex combination orders, and should consequently increase activity in the exchange’s flagship euroyen futures, said the exchange. Japanese technology company Fujitsu developed the new clearing and settlement system.

“Our exchange up to now has only traded short-term interest rate products,” said the official. “By introducing the Liffe Connect system we are going to be able to have a wider variety of products on the exchange, and as part of that we decided to go into not only the short-term market but also the long-term market.”

Faced with the prospect of weak equity markets, investors have turned to 10-year and increasingly 20-year Japanese government bonds to park their money, said another trader. As a result, there is now more activity in 20-year swaps than in two-year swaps. “They’re not making much money, so I guess they’re looking for other products that are not as dependent on the short-end,” he said.