Government Bond Futures Contract
VCN – In order to help investors have a better view of the coming product of Government Bond Futures Contract, the State Securities Commission (SCC) will introduce more about this product.
There are similar characteristics of a Government Bond
According to the SCC, the Government Bond Futures Contract is one kind of listed derivative securities, of which underlying assets are a Government Bond.
Like other Futures Contract products, Government Bond Futures Contract is a tool traded on a centralized exchange with standardized conditions. Standardized conditions are detailed in the description of the contract.
Based on the assessment of market demand, practical conditions in Vietnam and the experience to successfully develop Government Bond Futures Contract in some regional countries, Hanoi Stock Exchange designed five-year Government bond futures contract, which was approved by the SCC.
Accordingly, the five-year Government bond futures contract in Vietnam has underlying assets as a hypothetical bond which has similar characteristics of a Government bond with par value of VND 100,000 and five-year term, nominal interest rate of 5% per year, twelve-month interest payment term and principal payment once upon maturity.
The selection of five-year term of has been considered based on liquidity as well as the proportion of this term in the term structure issued on the spot market.
According to the Hanoi Stock Exchange, five-year Government bonds are the most issued by the State Treasury on the primary market and have good liquidity in the secondary market.
The selection of five-year government bonds as the underlying assets of the Government Bond Futures contract is expected to best meet the investment needs and risk prevention of investors.
The contract size is VND 1 billion is considered and selected based on consultation of market members and in accordance with the conditions of Vietnam derivatives market. The large size of the contract will reduce the number of investors who are able to participate in transactions, restrict liquidity, and easily manipulate prices, making the market more volatile. In addition, the larger, the size of the contract is, the smaller the number of investors who are able to buy underlying assets for transfer in case of payment for physical delivery will be. This increases the risk of payment capacity loss.
According to regulations, trading volume of Government bond futures contract must be at least 1 contract, equivalent to VND 1 billion of nominal value. Thus, investors can make trading orders with volume of 1, 2, 3 contracts. However, the real money that they spend on trading a Government Bond Futures contract is the size of the contract multiplied by the margin rate required by the Vietnam Securities Depository (VSD). Therefore, derivative tools in general and Government bond futures contract in particular are tools using financial leverage.
In terms of maturity month, the Government Bond futures contract has 3 months of maturity according to the latest quarterly period. For example: in February, the Stock Exchange listed that Government Bond Futures contract matures in March, June and September.
Payment operations are made through VSD
The delivery method of Government bond futures contract is a physical delivery method with the last payment date being the third working day after the last trading day. The seller selects and decides the delivery of bonds in the delivery bond basket to perform the bond payment obligation to the buyer. In return, the buyer pays the money when he receives the bond at the last payment day.
All these payment operations are made through the VSD as a central clearing partner (CCP). In some cases where the seller is unable to make the payment or has not enough bonds to transfer, the cash payment will be applied and the seller will pay a certain fine described in Circular No. 23/2017/TT-BTC dated 19/3/2017 of the Ministry of Finance.
According to the SCC, in derivatives markets around the world, only 2-3% of futures contracts of Government bonds are maintained until maturity to make maturity payments. Most Government bond futures contracts are usually offset in the maturity month or rolled-over. For example, in Japan, the ratio of Government Bond Futures contracts which are rolled-over before maturity is 99%; in the US market, this ratio is only about 2.6%.
Moreover, the margin rate of the Government bond futures contract is decided by the SDC on the basis of consideration of the risk level and approved by the SCC. Margin rate may change according to market movements.
Currently, for the Government bond futures contract, VSD expects to apply two types of deposit: initial margin and delivery margin. In which, the minimum initial margin is expected at 2.5% and the delivery margin is 5%. Securities companies may apply these margin levels or higher levels than the minimum margin level announced by VSD.
The limit to orders as stipulated in Decree 42/2015 / ND-CP refers to the maximum amount of derivative securities to be traded by placing an order. For Government bond futures contract, the maximum limit to orders is executed on an order is 500 contracts.
Position limit as prescribed in the form of Government bond futures contract is decided by VSD and approved by the SCC according to Official Letter No. 2620 / UBCK-PTTT dated 2/5/2019 as follows : the position limit applicable to the type of professional securities investors is 10,000 contracts / account; to institutional investors is 5,000 contracts / account.
In the short term, the position limit for individual investors has not been applied because in the first stage, the Government bond futures contract is oriented to the institutional investors and has not been applied for individual investors to limit speculation activities (because individual investors do not hold Government bonds on the primary market). In the long run, it is possible to consider allowing individual investors to participate in order to promote liquidity for the market as well as to diversify investors.