Deliverable future contracts start disappointingly – Krant

KARACHI: 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 held back from making offers in the 90-day product.

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

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

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

Thanks to the newly launched 90-day product, investors can access DFCs with three different maturities, the expiry date of the current month, the expiry date of the next month and the expiry date of the last month at the beginning of each contract month.

Still, they have shown moderate interest in the new product which aims to address their recurring liquidity issues in the rollover week. Unlike August contracts in 73 scrips, PSX data showed that September and October contracts existed in only five and four securities, respectively. As many as 86 stocks are eligible to trade on the futures counter. Volumes were also remarkably lean in the longer-term DFCs.

Institutions have so far been reluctant to make offers in longer-term forward 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 enter into longer-term contracts. The market went through a period of downward pressure and uncertainty during the final days of the 30-day contract, which will now be avoided as investors have the opportunity to roll over their outstanding positions smoothly, he added.

There was no rollover week-related stock market volatility 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 Shahid Ali Habib, CEO of Arif Habib Ltd. The situation was brought under control this week. People only get nervous when there are too many congested positions, he said.

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

It is our responsibility as brokers to make investors aware of this product. They will be comfortable with this contract in a few months, he said.

According to PSX director Farrukh H Khan, in public consultations and committees of capital market participants, investors of all kinds were enthusiastic about 90-day futures. In order to get the desired results according to our expectations, we will have to wait for our investors, big or small, to become acquainted with the product and use it regularly, he said, noting that overall volumes on the PSX have fallen due to a wave of Covid-19 cases and lockdown-related fears.

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

Regarding the stated target to reduce 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 few 90-day periods for the PSX to have enough data to assess the reduction in volatility in the rollover week, he said.

Published in Dawn, August 1, 2021