Efficiently Manage Portfolio Interest Rate Risk With DV01 Treasury ...

TRADING AND MARKET SERVICES

Efficiently Manage Portfolio Interest Rate Risk With DV01 Treasury Futures At Nasdaq, we’re committed to developing innovative products to drive the markets of tomorrow. That’s why we’re preparing to offer more choice in the interest rate derivatives marketplace with DV01 Treasury Futures, our upcoming duration product – pending all regulatory approvals. Slated to trade on our Nasdaq Futures exchange (NFX), DVO1 Treasury Futures or “the dollar value of one basis point” allow you to hedge against the price sensitivity of a portfolio. As an innovative and precise alternative in the fast growing rates futures marketplace, DV01 Futures aim to add certainty to the Treasury markets and provide market participants with the opportunity to improve efficiency, consolidate liquidity and maintain a level playing field in the rates market.

REFLECTING A NEAR PRECISE HEDGE

Nasdaq 30YR DV01 Futures Value

$2,000

$1,500

Cash 30YR DV01 Value

$1,000

CBOT 30YR CTD Equivalent DV01

$500

$0 0

5YR

10YR

15YR

20YR

25YR

30YR

SOURCE DATA: COMPARISON OF CBOT & NFX CONTRACT SPECIFICATIONS WITH CASH MARKET TREASURIES.

Historically, there has been only one instrument to manage portfolio interest rate risk. Now, Nasdaq will offer a choice. In the current Treasury futures market, cheapest to deliver economics, basket-delivery option, and off-market coupon specifications make for imprecise DV01 hedging. For example, CBOT 30YR Bond Futures have a range of deliverable instrument DV01 values, which do not precisely line up with the cash On-the-Run (OTR) 30YR Treasury. In contrast, Nasdaq 30YR DV01 Treasury Futures line up closely with the cash 30YR OTR providing portfolio managers precision to manage exposure at key points on the yield curve.

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TRADING AND MARKET SERVICES

HEDGE WITH CONFIDENCE: DV01 FUTURES MATCH CASH MARKET POSITION • A Portfolio Manager updates model assumptions and runs the risk of her portfolio. After recalculation, her portfolio has increased its long exposure to the 10YR interest rate point of the yield curve by $70k/.01 (i.e., she will make or lose $70k for every one basis point change in 10YR yield).

• Rather than neutralizing her interest rate exposure by selling the less-liquid positions into unfavorable markets, she sells 81 Nasdaq U.S. 10YR DV01 Treasury Futures contracts ($70k / $860 DV01 = 81 contracts). She is now able to wait for better credit conditions to offload her actual positions.

• Her portfolio consists of moderately liquid products like corporate bonds, but she feels that market conditions are not conducive to reducing her credit position at this time.

PRODUCT COMPARISON Nasdaq DV01 Treasury Futures Contract

Basket-Deliverable Treasury Futures Contract

• Physical settlement, deliverable to a basket of Deliverability/Settlement

• Cash settlement based on clear mark-to-market

bonds

• Seller has last-minute ability to select delivery instrument

Operational complexity

• Minimal - cash settlement

• Requires operational infrastructure to accept delivery of U.S. Treasuries

Pricing and trading increment

• 100 - implied yield

• Extensive price calculation against a theoretical 6% coupon instrument

Trading increment

• Linked to underlying bond duration

• 1/32nd or 1/64th of a point

Duration

• Designed to closely track the reference note or bond

• Variable depending on rate, yield curve and volatility levels in market

Able to cleanly hedge relevant risk buckets

• Yes - 2YR, 5YR, 10YR, 30YR

• No –1YR9M, 4YR2M, 6YR5M, 9YR5M, 15YR, 25YR

Final settlement process

• QWAP process is transparent

• Dependent on short position holder and funding markets

Convexity

• Non-convex due to fixed value per price increment

• Negatively convex - risk is complex to model due to specifics of the deliverable basket

Funding proxy

• On The Run Treasury at time of settlement

• Basket of off the run bonds, pro rata based on likelihood of delivery

Useful for direct observation of OTR Treasury volatility

• Yes due to convexity difference with OTR

• No

MORE INFORMATION To learn more, contact the Nasdaq Fixed Income team at [email protected] © Copyright 2018. All rights reserved. | 0806-Q18

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FOR MORE INFORMATION, VISIT BUSINESS.NASDAQ.COM/FUTURES SUBJECT TO REGULATORY FILING

U.S. DV01 TREASURY FUTURES NASDAQ FUTURES, INC. (NFX) CONTRACT SPECIFICATIONS CONTRACT NAME

U.S. 2-YR DV01 Treasury Futures U.S. 5-YR DV01 Treasury Futures

U.S. 10-YR DV01 Treasury Futures U.S. 30-YR DV01 Treasury Futures

DESCRIPTION

Cash settled On The Run U.S. Treasury expressed as 100 minus the yield of the corresponding U.S. Treasury Note or bond (UST 2yr yield 1.98%; 100-1.98 = 98.02). The minimum trading tick increment is equivalent to two tenths (2YR) or one tenth (5YR, 10YR, 30YR) of the dollar value of one basis point (DV01) change in yield of the current On The Run U.S. Treasury as defined in contract rules.

UNDERLYING INTEREST

One hundred times the dollar value (DV01) assigned by the Exchange at the time of listing for each contract month, of a one basis point change in yield of the current On The Run U.S. Treasury security with a face value of $1,000,000 having fixed semi-annual coupon payments.

TICKER SYMBOLS CONTRACT MONTHS TRADING HOURS TRADING PLATFORM

MINIMUM PRICE INTERVAL DOLLAR VALUE PER TICK

2-YR = TUDV

5-YR = FVDV

10-YR = TYDV

30-YR = USDV | (Base Trading Symbols)

Up to 12 consecutive or non-consecutive monthly contracts, beginning with the nearest available month. 7:00 PM to 6:00 PM Eastern Prevailing Time (EPT) Sunday through Friday. Nasdaq Futures Inc. (NFX) Outright and Spreads: Fractional Basis Point increments: 0.001  0.002  0.003 1.980% (100-1.980) equals 98.020 1.981% (100-1.981) equals 98.019 1.982% (100-1.982) equals 98.018 1.983% (100- 1.983) equals 98.017 1.984% (100- 1.984) equals 98.016

The increment between ticks equals the dollar value of fractional basis points of the current OTR Treasury, as defined in contract rules.* UST 2yr equals $190 [0.002 = $38.00] UST 5yr equals $460 [0.001 = $46.00] UST 10yr equals $860 [0.001 = $86.00] UST 30yr equals $1940 [0.001 = $194.00]

*For clarification, each contract month will be listed with an updated DV01 dollar value corresponding to the respective On The Run U.S. Treasury indicated in an NFX Futures Trader Alert. DAILY SETTLEMENT PRICE

Quality Weighted Average Price (“QWAP”) shall be determined by reference to the Yield-Derived Price of best bids, best offers, and executed transactions in the corresponding U.S. DV01 Treasury futures on the Nasdaq Futures, Inc. (NFX) Trading System Order Book during the settlement period for the contract (the “Settlement Period”) as described in the Daily Settlement section of each product rule. 2-YR and 5-YR, the last NFX and NFI trading day of the contract month; trading ceases at 3 PM EPT.

LAST TRADING DAY

FINAL SETTLEMENT

10-YR and 30-YR, the 15th day of the contract month if an NFX and NFI trading day, otherwise the preceding NFX and NFI trading day; trading ceases at 3 PM EPT. Final settlement for contracts held to expiration is by cash settlement in U.S. dollars.

FINAL SETTLEMENT DATE

Final Settlement Date is the next business day on which the Options Clearing Corporation is open for settlement following the Last Trading Day.

FINAL SETTLEMENT PRICE

Closing Quality Weighted Average Price (“Closing QWAP”) shall be determined by reference to the yield of best bids, best offers, and executed transactions in the corresponding U.S. Treasury security on the Nasdaq Fixed Income (NFI) Alternative Trading System Order Book during the settlement period for the contract (the “Closing Settlement Period”) as described in the Final Settlement section of each product rule. The Final Settlement Price shall be calculated on the Last Trading Day.

CLEARINGHOUSE

MORE INFORMATION © COPYRIGHT 2018

The Options Clearing Corporation

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