Why not a separate instrument for each issue?

Discussion in 'Financial Futures' started by Acumen, Jan 29, 2009.

  1. Acumen


    As someone who is completely new to the market, I am curious as to why each issue (especially bond) is not listed under its own instrument.

    If I have expectations of the direction of future yields I would rather be exposed to particular issues rather then the CTD.

    If I am holding a particular issue, I would have fewer calculations to do to put on a hedge.

    It just seems like it would make things much simpler. Why is this not standard practice?
  2. 1) It's easier and better to have one and only one standardized instrument.
    2) All of the trading volume can accumulate in one contract thereby creating tighter spreads, better liquidity and better transparency.
    2) If you want "customization", you can take your chances in the OTC/RFQ market.
  3. Acumen


    Considering there was 174,816 contracts volume in ZB today I don't see it as being a problem. Since there is an OTC market on individual issue futures it shows there is a demand.

    The standardized instrument that is currently in use seems to be full of inefficiencies, from the 6% conversion factor to inflection points from switching CTD. Many calculations are wasted on figuring out just what bond you’re going to end up having to price, before pricing it.

    Why are individual issues not directly priced on remaining coupon payments at time of delivery plus accrued interest and principal discounted for expected inflation and adjusted to new issue yields?

    They must work out to close to that by the time all the esoteric calculations are done in determining conversion factors, crossover points, which bond will be CTD, the futures price and the carry. It seems like allot of work for no good reason that I can discern.

    I am not trying to argue; I am just trying to understand this markets structure and am confused as to the motive behind the system. I understand that for a one instrument system the current process is fairly efficient, but the benefits of having a multiple instrument system seem enough to justify it. Is there more I am missing?