2
Derivative products
‘Derivatives’ is the generic term used for a whole host of products that
are traded either as listed products on an exchange or as bespoke,
tailored products negotiated over-the-counter (directly between the
counterparties).
There are many thousands of derivative products yet most of
them fall into categories that identify the underlying such as ‘inter-
est rate’, ‘commodity’ or ‘currency’, or the specific instrument char-
acteristic such as ‘interest rate swap’, ‘cocoa futures’, etc. This
categorisation is then used to produce everything from statistics
(Table 2.1) to identifying the division within a market that trades
the products.
Table 2.1 Volume by category (in millions).
2003 2002 Change % Change
Global
Equity indices 3960.87 2791.18 1169.69 41.91
Interest rate 1881.27 1478.44 402.83 27.25
Individual equities 1558.52 1354.70 203.82 15.05
Ag commodities 261.15 199.39 61.77 30.98
Energy products 217.56 209.37 8.19 3.91
Non-precious metals 90.39 71.57 18.82 26.29
Foreign currency/index 77.85 60.56 17.28 28.53
Precious metals 64.46 51.26 13.2 25.75
Other 0.66 0.8 0.14 17.14
Total 8112.73 6217.28 1895.45 30.49
Continued
Even where a derivative product is seemingly the same, the actual
characteristics may differ considerably so a bond futures contract is
different from an equity index future as illustrated by the differences
in the two example contract specifications for the FTSE 100 Index
and Long Gilt futures contracts listed on Euronext.liffe shown
below.
16 Clearing and settlement of derivatives
Table 2.1 Volume by category (in millions)—cont’d
2003 2002 Change % Change
US
Individual equities 791.64 679.7 111.94 16.47
Interest rate 678.3 579.21 99.09 17.11
Equity indexes 420.55 327.72 92.82 28.32
Energy products 112.4 115.93 3.53 3.05
Ag commodities 107.86 97.7 10.16 10.40
Foreign currency/index 36.1 26.07 10.03 38.46
Precious metals 21.76 14.91 6.85 45.94
Non-precious metals 3.25 2.92 0.33 11.24
Other 0.66 0.73 0.07 9.85
Total 2172.52 1844.90 327.62 17.76
Non-US
Equity indices 3540.32 2463.46 1076.87 43.71
Interest rate 1202.97 899.23 303.74 33.78
Individual equities 766.88 675.01 91.88 13.61
Ag commodities 153.29 101.69 51.6 50.75
Energy products 105.16 93.44 11.72 12.54
Non-precious metals 87.14 68.65 18.49 26.93
Precious metals 42.7 36.35 6.35 17.47
Foreign currency/index 41.74 34.49 7.25 21.03
Other 0 0.07 0.06 98.80
Total 5940.22 4372.38
Source: Futures Industry Association.
FTSE 100 Index Futures
Unit of Trading Contract Valued at £10 per index
point (e.g. value £65,000 at 6500.0)
Delivery Months March, June, September, December
(nearest four available for trading)
Derivative products 17
Quotation Index points (e.g. 6500.0)
Minimum Price Movement 0.5 (£5.00)
(Tick Size & Value)
Last Trading Day 10:30:30
Third Friday in delivery month
1
Delivery Day First business day after the Last
Trading Day
Trading Hours 08:00–17:30
1
In the event of the third Friday not being a business day, the Last Trading Day
shall normally be the last business day preceding the third Friday.
Trading Platform
• LIFFE CONNECT
®
Trading Host for Futures and Options.
• Algorithm: Central order book applies a price-time trading
algorithm with priority given to the first order at the best price.
• Wholesale Services: Asset Allocation, Block Trading, Basis
Trading.
Exchange Delivery Settlement Price (EDSP)
The EDSP is based on the average values of the FTSE 100 Index
every 15 seconds between (and including) 10:10 and 10:30 on the
Last Trading Day. Of the 81 measured values, the highest 12 and
lowest 12 will be discarded and the remaining 57 will be averaged
to calculate the EDSP. Where necessary, the calculation will be
rounded to the nearest half index point.
Contract Standard
Cash settlement based on the Exchange Delivery Settlement Price.
Economic and Monetary Union/Euro
Please refer to the full contract specification on the LIFFE web site
at www.liffe.com.
Unless otherwise indicated, all times are London times.
Long Gilt Futures
Unit of Trading £100,000 nominal value notional
Gilt with 6 per cent
1
coupon
Delivery Months March, June, September, December,
such that the nearest three delivery
months are available for trading
18 Clearing and settlement of derivatives
Quotation Per £100 nominal
Minimum Price Movement 0.01 (£10)
(Tick Size & Value)
First Notice Day Two business days prior to the first
day of the delivery month
Last Notice Day First business day after the Last
Trading Day
Last Trading Day 11.00 – Two business days prior to
the last business day in the delivery
month
Delivery Day Any business day in delivery month
(at seller’s choice)
Trading Hours 08:00–18:00
Trading Platform
• LIFFE CONNECT™ Trading Host for Futures and Options.
• Algorithm: Central order book applies price/time priority trading
algorithm.
• Wholesale Services: Asset Allocation, Block Trading, Basis
Trading.
Exchange Delivery Settlement Price (EDSP)
The LIFFE market price at 11.00 on the second business day
prior to Settlement Day. The invoicing amount in respect of each
Deliverable Gilt is to be calculated by the price factor system.
Adjustment will be made for full coupon interest accruing as at
Settlement Day.
Contract Standard
Delivery may be made of any gilts on the List of Deliverable Gilts
in respect of a delivery month, as published by the Exchange on
or before the tenth business day prior to the First Notice Day of
such delivery month. Holders of long positions on any day within
the Notice Period may be delivered against during the delivery
month. All gilt issues included in the List will have the following
characteristics:
• having terms as to redemption such as provide for redemption
of the entire gilt issue in a single instalment on the maturity
date falling not earlier than 8.75 years from, and not later
Derivative products 19
than 13 years from, the first day of the relevant delivery
month;
• having no terms permitting or requiring early redemption;
• bearing interest at a single fixed rate throughout the term of
the issue payable in arrears semi-annually (except in the case
of the first interest payment period which may be more or less
than six months);
• being denominated and payable as to the principal and interest
only in pounds and pence;
• being fully paid or, in the event that the gilt issue is in its first
period and is partly paid, being anticipated by the Board to be
fully paid on or before the Last Notice Day of the relevant deliv-
ery month;
• not being convertible;
• not being in bearer form;
• having being admitted to the Official List of the London Stock
Exchange; and
• being anticipated by the Board to have on one or more days
in the delivery month an aggregate principal amount out-
standing of not less than £1.5 billion which, by its terms and
conditions, if issued in more than one tranche or tap or
issue, is fungible.
Recent Changes
• For the March 1998 delivery month (and previous delivery
months), the notional coupon was 9 per cent.
• Up to and including the June 1998 delivery month, the unit of
trading was £50,000 nominal.
• The tick size for the June 1998 delivery month switched to
1/100th of a point from the close of business on 8 May 1998
from 1/32.
• The tick value for the June 1998 delivery month, from the close
of business on 8 May 1998 until expiry, was £5. Up to 8 May,
the tick value was £7.8125.
• Prior to December 98 contract maturity bracket 10 to 15 years.
1
For December 2003 delivery month (and previous delivery months), notional
coupon was 7 per cent.
Unless otherwise stated, all times are London times.
Source: Euronext.liffe.
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