Tokyo Financial Exchange to introduce BOJ overnight rate futures
The new contract will cover rate moves between policy meetings, as trading in the exchange’s three-month TONA futures declines.
Tokyo Financial Exchange will introduce a futures contract linked to the Bank of Japan’s overnight call rate in October, giving traders another way to hedge interest-rate volatility between the central bank’s policy meetings.
The exchange said its three-month TONA futures have not met traders’ demand for hedging shifts in rate expectations associated with individual BOJ meetings. Ryosuke Seo, a director in the exchange’s wholesale business department, said more active interest-rate movements were increasing demand for derivatives trading.
The BOJ’s second policy-rate increase of the year brought the rate to 1.25%, its highest level in 31 years. The pace of tightening has accelerated from the roughly six-month intervals between earlier increases.
Despite expectations of further BOJ tightening, the exchange said September trading volume in its three-month TONA futures fell nearly 50% from a year earlier. Both Tokyo Financial Exchange and Osaka Exchange, part of Japan Exchange Group, introduced three-month TONA contracts in 2023.
The exchanges face competition from a much larger over-the-counter interest-rate swap market, where users can customize contracts, including their maturities. Swap rates for the intervals between BOJ meetings are commonly used to assess the probability of a rate increase.