Tokyo Financial Exchange to launch BOJ overnight rate futures as rate swings quicken
The Tokyo Financial Exchange will launch futures tied to the Bank of Japan's overnight call rate this month, responding to stronger demand for hedging as the central bank shifts to more frequent policy moves. The exchange's existing three-month TONA contract has seen volumes fall sharply.
The Tokyo Financial Exchange will launch a new futures contract tied to the Bank of Japan's (BOJ) overnight call rate this month, aiming to help traders hedge against heightened volatility as the central bank adopts a more active policy stance. The exchange said the product is designed for investors seeking to position for rate moves between BOJ policy meetings, a need its existing three-month TONA futures have not fully met.
The BOJ last month raised its key policy rate for the second time this year to 1.25 per cent, a 31-year high, and markets widely expect another hike by December. That pace marks a significant acceleration from the previous pattern of roughly six-month gaps between increases.
“Interest rate moves have become more active lately, and there is an increase in demand for derivatives trading,” said Ryosuke Seo, a director in the wholesale business department at the Tokyo Financial Exchange.
Trading in the three-month TONA futures has declined in recent months even as markets anticipate further BOJ tightening. September volume fell nearly 50 per cent from a year earlier, the exchange said.
Three-month TONA futures were launched in 2023, a year before the BOJ ended its negative interest rate policy, at both the Tokyo Financial Exchange and Osaka Exchange, a unit of Japan Exchange Group. The two exchanges compete with the larger over-the-counter (OTC) market for interest rate swaps, which offers customisable maturities.
The OTC market for overnight index swaps (OIS) has been growing, with the notional value of yen contracts of up to and beyond 30 years reaching a record high last month, according to Japan Securities Clearing Corp. Swap rates covering the period between BOJ meetings are widely used to gauge the likelihood of a rate increase.
