NASDAQ OMX STOCKHOLM AB OFFERS CLEARING OF RIKSBANK FUTURES

The monetary policy of the Riksbank (Central Bank of Sweden) is of great significance to interest rates in capital markets. Since the repo rate is the principal interest rate employed by Riksbanken, market players carefully monitor changes in this rate and the signals given by Riksbanken. Expectations regarding future repo rates are key indicators for many players when choosing to take positions in the interest-rate market.
Accordingly, NASDAQ OMX Stockholm has decided to introduce cash-settled futures specifically based on the Riksbanks repo rate. The contract base is a fictitious loan with a term corresponding to the period between two IMM dates, with final settlement occurring against the average repo rate for the period concerned.
 

Facts about Riksbank Futures 

Market model and central counterparty clearing

Trades in Riksbank futures will be reached through bilateral negotiations between buyers and sellers, and reported to NASDAQ OMX for central counterparty clearing. The exchange has agreements with a number of market makers regarding the maintenance of a market with two-way prices aimed at ensuring ample liquidity in the contract. Market makers are expected to establish indicative two-way prices in the exchanges trading system in accordance with standard market practices in the Swedish interest-rate market.  

Trading is performed through a bilateral negotiation between buyer and seller. The trade is then reported to NASDAQ OMX Stockholm for clearing. Novation, meaning when the exchange substitutes existing contracts with new ones, in relation to the buyer and seller takes place when the trade details are matched and collateral has been established. There is no counterparty relationship between the buyer and seller following this; instead both parties use the exchange as a counterparty.
 

Contract base and settlement principles

The contract base is a fictitious loan of SEK 1,000,000, which extends between two consecutive IMM dates, meaning between the third Wednesday in the months of March, June, September and December. Accordingly, the underlying duration can vary between series with different delivery months. Normally the period is 90 or 91 days, but may be longer. The term corresponds to the terms for NASDAQ OMX Stockholms FRA contract, but the differences in the name standards and underlying interest-rate periods for each delivery month should be observed.
There is no delivery of the underlying loan amount. Only a cash amount corresponding to the interest-rate difference between the agreed interest rate and the fixing rate will be paid. Accordingly, the contract can be considered a CFD, contract for difference. The buyer of the contract is a fictitious borrower who assumes the obligation to pay the difference between the agreed interest rate and the fixing rate to the seller on condition that the agreed interest rate is higher. If the agreed interest rate is lower than the fixing rate, the buyer is paid the interest rate amount by the seller.
When the contract is cleared, no actual payment takes place between the buyer and seller; instead, each party receives/pays from/to the exchange (the clearing house).
 

Settlement and offsetting

All purchased and sold contracts are entirely offsettable against each other. This means that only one net position is held against the clearing house and, if the contracts sold equal those purchased, the portfolio may be said to be closed in practice.
Daily cash settlements take place on bank days at noon and are based on the profit/loss on the net position at the end of the trading day on the bank day before the settlement day.
 

Name standard

Contracts are listed by the system short name RIBA followed by a letter designation for the delivery month and the figure for the year in which the delivery month falls.

Examples of Riksbank Future September 2008 contract, RIBAU8 

Collateral margins are established continuously during the term of the contract. For a calculation of collateral margins, see the fact sheet RIBA futures margins.
 

Calculation of final fix RIBAU8

Final fix corresponds to the average repo rate during the term of the contract, expressed as compound interest. In this case, there are 13 repo-rate periods with a total of 91 calendar days.
The compound interest, expressed to three decimal places, for the interest period between June 18, 2008 and September 17, 2008 thus equals 4.485%

((1,000826389&)*(1,000826389&)*(1,000826389&)*(1,000875) *(1,00085) *(1,000875)* (1,000875) *(1,000875) *(1,000875) *(1,000875) *(1,000875) *(1,000875) *(1,0009236&)-1)* (360/91)*100= 4,485
 

Example of final settlement RIBAU8

Final settlement takes place one bank day before the third Wednesday of the end month. For RIBAU8, final settlement takes place on Tuesday, September 16 and is based on the difference between the final fix calculated on Monday, September 15, and the last daily fixing calculated on Friday, September 12. In this example, we have assumed that the daily fixing rate on September 12 was 4.480% and that we have a purchased position of 10,000 contracts.
Number of purchased contracts * nominal amount * (final fix daily fix)/100 * d/360
10,000 * 1,000,000 * (4.485-4.480)/100 * 91/360 = 126,388.89 (rounded to 126,389)
 

Example of daily fix calculation 

The daily fix is calculated as the median value of the indicative buy and sell interest rates that market makers, among others, quote in the stock exchanges trading system on bank days at 4:15 p.m.

In the example above the daily fix is 4.480%
 

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