SGX Nikkei 225 Total Return Futures: Repo & Dividend Volatility, and LIBOR Phase Out To Drive Growth

Equity Index Total Return Futures (TRF) offer a listed solution to trade the implied equity repo. Market dislocations earlier this year along with elevated equity index volatility and repricing of future dividend payments opened up trading opportunities for market participants that had the ability to price and trade the entire suite of delta one products.

Implied equity repo is not very widely traded in Asia but that is changing with the introduction of listed Total Return Futures (TRF) that closely replicate the pay-off of OTC traded Total Return Swaps (TRS). TRFs offer numerous advantages over TRS’ in that they are fully fungible, centrally cleared (mitigates counterparty risk), and portfolio margined (offering margin offsets with other listed products). Japan implied equity repo has been volatile over the last few years partly due to the Bank of Japan’s ETF buying program opening up trading opportunities and attracting a new breed of investors to the TRF product. There has been renewed interest in trading TRFs due to heightened equity market, repo and dividend volatility during the COVID-19 pandemic.

With LIBOR scheduled to be phased out by December 2021, there is pressure on market participants to migrate positions to a different benchmark. The SGX Nikkei 225 TRF uses MUTAN (Uncollateralised Overnight Call Rate) as the benchmark for the floating rate and is a viable alternative for market participants that are looking to migrate from an OTC product linked to LIBOR to a listed alternative that does not reference LIBOR.