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New Zealand short term interest rate derivatives

ASX 90 day New Zealand Bank Bill futures and options

ASX’s New Zealand 90 day bank bill futures and options are the leading short term interest rate derivatives products in the New Zealand market. As New Zealand’s most actively traded derivatives product the New Zealand 90 day bank bill futures contract is used by market participants and commentators as the key indicator for New Zealand interest rates.

New Zealand 90 day bank bill futures and options are approved for trading by:

  • US Commodities Futures Trading Commission (CFTC)
  • UK Financial Services Authority (FSA)
  • Monetary Authority of Singapore (MAS) and
  • Hong Kong Securities and Futures Commission (SFC Hong Kong).

Trading opportunities

  • Hedge against fluctuations in the New Zealand cash rate and better manage daily cash exposures.
  • Arbitrage opportunities against related OTC products such as overnight indexs swaps.
  • Intra commodity spread trading between different contract months.
  • Inter commodity spread trading opportunities between other interest rate products including the New Zealand 90 day bank bill futures contract.
  • Indicator of market expectations regarding changes to the New Zealand Official Cash Rate.

Benefits of exchange-traded markets

Trading on ASX offers the following specific benefits of exchange traded markets, such as:

  • Price transparency and liquidity
  • Immediate execution and confirmation
  • Reduction of counterparty risk
  • Centralised clearing supported by a clearing guarantee

 

ASX Packs and Bundles on 90 day New Zealand Bank Bill futures

 ASX’s Packs and Bundles on 90 Day New Zealand Bank Bill Futures provide participants with an exchange alternative to OTC Swaps and enables hedging activity for FRA and Swap traders. Packs and Bundles allow participants to gain access to the New Zealand short-term interest rate derivatives market with the ease of a single transaction and greater capital efficiency.

Packs and Bundles are an efficient way to trade an OTC equivalent 1 or 2 year swap, with the added benefits offered by exchange traded markets.

Packs

A Pack is a strip of four successive Bank Bill Futures products that allow participants to trade segments of the yield curve in a single transaction, without the legging risk inherent with trading each Bank Bill Futures contract separately. ASX offers two New Zealand Bank Bill Futures Packs:

White Pack on 90 Day Bank Bill Futures (1st to 4th quarterly expiry months)
Red Pack on 90 Day Bank Bill Futures (5th to 8th quarterly expiry months)

Bundles

A Bundle is a strip of successive Bank Bill Futures products covering more than four successive futures contracts. The first contract in a Bundle is the 1st quarterly contract in the respective Bank Bill Futures contracts. ASX offers a two year New Zealand Bank Bill Futures Bundle:

2nd Year Bundle on 90 Day Bank Bill Futures (1st to 8th quarterly expiry months)

Providing Trading Flexibility

Packs and Bundles provide trading flexibility in managing interest rate exposure and allows you to execute additional trading strategies. Packs and Bundles:

Allow participants to trade segments of the yield curve in a single transaction.
Are traded as an average price of the constituent Bank Bill Futures contracts, providing a transparent mechanism for participants to match an executed Pack or Bundle price with allocated leg prices.

Upon execution of a Pack or Bundle on ASX 24 NTP, underlying Bank Bill Futures positions are allocated through to ASX Clear (Futures). The allocated Bank Bill Futures will be marked-to-market together with Bank Bill Futures created from outright futures trades. Allocated Bank Bill Futures contracts benefit from the same margin offsets available when trading outright Bank Bill Futures contracts.

Execution Efficiency

Packs and Bundles provide users with the benefit of trading a single product in order to gain multiple Bank Bill Future contract exposure, thereby reducing legging risk inherent with trading individual futures contracts.

Trading ASX Packs and Bundles 90 Day New Zealand Bank Bill Futures

Trading of Packs and Bundles is conducted on-market via ASX's electronic platform NTP, and off-market through block trade and exchange for physical transactions.

Implied in pricing functionality draws pricing and liquidity into the packs and bundles from the underlying 90 Day NZ Bank Bill Futures providing price transparency against executable volume.

Leg Price Allocation Procedure

Upon execution of a Pack or Bundle, underlying Bank Bill Futures prices will be determined by the matching engine. The underlying Bank Bill futures leg prices can be determined in 1 of 2 ways:

1) Where an outright pack or bundle order is executed against another pack or bundle order the previous Daily Settlement Prices (DSPs) of the underlying futures contract will be used as a starting point and adjusted by a price adjustment factor to achieve an implied Pack or Bundle price which equates to the price of the executed underlying futures contracts.

Price adjustments will be made via a consistent proportional price movement from the DSPs with the exception that the underlying futures contract with the longest dated expiry will be further adjusted up or down in increments of 0.01 to the extent that such adjustment will achieve a more accurate implied Pack or Bundle price.

A working example of the leg price allocation process is outlined in the Packs and Bundles Strip Leg Allocation Process presentation available on the ASX website. Participants can also estimate leg prices by the Packs and Bundles Leg Allocation calculator also available on the ASX website.

2) Where a pack or bundle order is executed against implied price and volume, the allocated legs will be determined by the underlying Bank Bill futures.