SGX to launch interest rate derivatives on Japan repo

The SGX Nikkei 225 Index TRF will kick off on 13 May.

The Singapore Exchange (SGX) will launch what it claims to be Asia’s first Total Return Futures (TRF), based on the Nikkei 225 Index, in its drive to pivot towards futurised derivatives, expanding SGX’s suite of risk-management tools.

The SGX Nikkei 225 Index TRF will be introduced on 13 May. This listed solution enables investors to replicate the full economics, including the payout profile, of standard Nikkei 225 Index total return swaps, which are currently transacted over-the-counter (OTC). The TRF, with contract months listed up to 10 years, will also allow investors to trade a particular financing cost – the implied equity repo – for the first time.

“Japan has the largest and most mature securities borrowing and lending market in Asia. Notably, it has grown into one of the biggest markets for structured products against a low-yield environment. The market for total return swaps developed in support of structured product issuance, enabling investors to gain access to the total returns of a basket of stocks while hedging their financing costs,” SGX noted.

The local bourse believes that the TRF will spur greater transparency and capital efficiency, while offering new customers an opportunity to trade and hedge repo as it will mitigate pressures on capital, collateral and balance sheets, following Basel III and bilateral margining rules for uncleared OTC contracts.

“Repo is a new class of interest rate product that complements our comprehensive Japan equity derivatives offering, enabling participants to risk-manage both costs and benefits in Asia’s largest securities financing market. The TRF also supports our customers in meeting global financial market regulations,” Michael Syn, SGX head of derivatives, said.

It was back in 1986 when SGX pioneered the world’s first futures contract based on the Japanese stock market, the SGX Nikkei 225 Index Futures.