January launch planned for interest-rate futures

The Taiwan Futures Exchange plans to start interest-rate futures based on the 10-year government bond starting in January, followed by two other related contracts next year, helping bond investors manage risk.

The six-year-old exchange, which now offers five futures and two options products, also plans to introduce an interest-rate futures contract for one-month commercial paper by June and it is evaluating an options product for 10-year bond interest-rate futures, said Arthur Yeh, executive vice president of the exchange.

President Chen Shui-bian (陳水扁) last week announced the introduce interest-rates futures by the end of the year, as part of the government's financial reform efforts.

Futures contracts give bond investors, who are restricted from the practice of short-selling, or selling a security they don't own with the intention of buying it back more cheaply, a chance to protect against losses when bond prices fall, said Sam Chang, a bond analyst at Taipei-based Polaris Securities Co (寶來證券).

"The introduction of the futures contract is just in time, helping to ease the pressure of the bond yield volatility," Chang said.

A futures contract is an agreement to sell or buy a specific security or commodity at a previously agreed price and time.

Options allow investors to choose whether to buy or sell the underlying security at a prearranged price prior to the option's expiration date.

The Futures Exchange is aiming for an average daily trading of 6,000 interest-rate futures contracts initially, Yeh said. An average of 50,000 TAIEX-related futures contracts have traded daily since July, he said.

The daily volume of the stock index futures traded has more than doubled from about 20,000 last year as brokerages expanded their operations, Yeh said.

The daily average of the TAIEX-linked futures may rise at least 25 percent next year, and interest-rate futures trading volume may expand at a comparable pace, he said.

The government will also seek legislators' approval to lower the transaction tax rate for futures products, which would help boost trading in the derivatives market, Yeh said.

The transaction tax rate for index futures is 0.025 percent, according to futures exchange's Web site.

Separately, the exchange is also studying setting up futures contracts for dynamic random access chips, which serve as the main memory in personal computers, and flat-panel displays, Yeh said. He declined to give a schedule for the introduction of those products.