Deliverable futures contracts get off to an underwhelming start

Longer-term Deliverable Futures Contracts (DFCs) gained little traction during the first week of their launch on the Pakistan Stock Exchange (PSX) as institutional investors steered clear of making offers in the 90-day product.

DFCs are forward contracts to buy or sell stocks at a certain price with actual delivery in the future.

The PSX introduced DFCs of longer maturity on July 26 to control volatility that the stock market witnesses in the last week of every month when traders roll over their contracts to the next month to avoid settlement.

PSX launched 90-day DFCs on July 26 to control volatility

Thanks to the newly launched 90-day product, investors have access to DFCs of three different maturities — current month’s expiry, next month’s expiry and last month’s expiry — at the start of each contract month.

Yet they have shown subdued interest in the new product that aims to address their recurring liquidity problems in the rollover week. In contrast to August contracts in 73 scrips, PSX data showed September and October contracts existed in only five and four securities, respectively. As many as 86 stocks are eligible for trading on the futures counter. Volumes were also notably thin in the longer-term DFCs.

“Institutions have so far shied away from giving offers in the longer duration futures contracts. I think they are evaluating the risks of such exposure,” Next Capital CEO Najam Ali told Dawn.

“I am confident that these investors will gradually come into longer duration contracts. The market used to go through a period of downward pressure and uncertainty during the last days of the 30-day contract, which will now be avoided since investors have the opportunity to smoothly roll over their outstanding positions,” he added.

There was no rollover week-related volatility in the stock market in the last five trading sessions. However, the reason for business-as-usual on the PSX was not the launch of the 90-day product, said Arif Habib Ltd CEO Shahid Ali Habib. “The situation was under control this week. People get jittery only when there’re too many overleveraged positions,” he said.

Mr Habib said volumes will always be greater in the monthly product than in two- and three-month contracts. “People use leverage to take short-term positions,” he said, adding that the level of institutional arbitrage activity will play a most important role in popularising the 90-day product.

“It’s our responsibility as brokers to make investors aware about this product. They will get comfortable with this contract in a few months,” he said.

According to PSX Managing Director Farrukh H Khan, all kinds of investors were “enthusiastic about 90-day futures” in public consultations and committees of capital market participants. “To get the desired results as per our expectations, we will have to wait and see until our investors, big or small, get acquainted with the product and use it with regularity,” he said, noting that overall volumes have dropped on the PSX because of a surge in Covid-19 cases and lockdown-related fears.

He said the exchange will incorporate changes based on feedback from brokers and investors in the DFC regime to streamline it further.

As for the stated objective of reducing volatility in the rollover week, Mr Khan expressed hope that the new product will lead to lower volatility and higher volumes in this category. “It will take at least a couple of 90-day periods for the provision of sufficient data for the PSX to be in a position to assess the reduction of volatility in the rollover week,” he said.