SONIA-based futures and transitioning for LIBOR-based futures
By Ian Murphy
CurveGlobal® Three month SONIA Futures
This was the first three month futures contract launched by an exchange that referenced the reformed SONIA rate of the Bank of England.
At the same time, we made available the Cross Product Inter Commodity Spread (CP-ICS), which linked pricing with our existing Three month Sterling Future based on LIBOR.
CP-ICS is priced – CurveGlobal® Three month SONIA minus Three month Sterling
The CP-ICS is the listed version of the OTC LIBOR/OIS spread.
The CP-ICS benefits from full implied pricing of both in and out orders, which benefits the two individual contract order books and the order book of the ICS.
The CP-ICS generated 31% of our SONIA futures volume in 2019 and highlights the importance of this trading strategy.
Both individual contracts have notional values at £500,000 per lot, with minimum tick size and value of 0.005 and £6.25 respectively.
Watch this video to see how the CP-ICS works.
CurveGlobal® One month SONIA Futures
The One month SONIA contract launched at a notional of £1,500,000 per lot with minimum tick increments 0.005 and value £6.25. The date cycle is monthly third Wednesday (IMM monthly style) and follows the accrual convention of the three month contract.
The complementary characteristics of the new one month contract allowed a new ICS to be launched which reflected pricing of one month and three month time horizons.
The Yield Curve Inter Commodity Spread (YC-ICS)
YC-ICS is priced – CurveGlobal® One month SONIA minus CurveGlobal® Three month SONIA.
Inter Commodity Spread – Finer Price Tick
In July 2019, the pricing for both inter commodity spreads was enhanced by reducing the tick size to 0.001 (1/10 tick) and the corresponding minimum value to £1.25 to create the Finer Price Tick.
An order in an ICS, at 1/10 tick, does imply into the order books of the underlying contracts.
The Finer Price Tick and the improved implied pricing is shown in this video.
Global Markets will continue to actively monitor the ongoing rate reform initiatives in the market in continued collaboration with LCH and will seek to ensure an orderly and effective transition away from GBP LIBOR to SONIA should that ultimately be needed
- The proposals set out in this consultation are a crucial first step in ensuring that we are fully prepared to meet the needs of our respective Members and the market more widely
This consultation closes on 28 February 2020 – please do take the time to share your views with us
- The Bank of England, Financial Conduct Authority and the Working Group on Sterling Risk-Free Reference Rates have published a set of documents outlining priorities and milestones for 2020 on LIBOR transition.
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