Tokyo Financial Exchange is preparing to list futures on the unsecured overnight call rate following a sharp increase in Bank of Japan volatility. The aim is to provide a new hedging instrument for capturing interest-rate movements between policy meetings as the Bank of Japan proceeds with monetary policy normalisation.
Tokyo Financial Exchange is preparing this month to list a new futures contract linked to the Bank of Japan’s unsecured overnight call rate. This will enable traders to take positions based on expected interest-rate movements between the Bank of Japan’s monetary policy meetings.
The Bank of Japan has raised its policy rate twice this year, to 1.25%, creating new volatility in financial markets. There is recognition that existing hedging instruments are not fully meeting demand, and the introduction of the new contract is intended to strengthen the market’s infrastructure.
Three-month TONA futures are currently considered inadequate to meet demand for volatility around each Bank of Japan decision, with September trading volume down approximately 50% from the same month a year earlier. As over-the-counter trading centred on overnight index swaps (OIS) expands, the new listed contract will put the appeal of standardised exchange-traded products to the test.
Initial trends in trading volume and open interest could serve as indicators of whether unmet needs can be accurately identified as the Bank of Japan proceeds with normalisation.