treasury futures

EVT · Post by **EVT** » Fri Aug 12, 2005 4:18 pm

In todays WSJ they write

"...the CBOT levies a fine of 1% of a contracts value on anyone who fails to deliver a bond..."

Who does that levy go to? The CBOT or to the holder of the treasury future?

in addition to this if I am long a treasury future and at the maturity time of the future I am NOT supplied with a bond as stated ni the contract of the future how "well" am I compensated??

Is the marking to market always sufficient to guarantee that I dont face a loss on the futures contract?

hooloovoo · Post by **hooloovoo** » Fri Aug 12, 2005 4:25 pm

EVT - can you post a link to that WSJ article. I had thought the penalty for non delivery was not actually known but assumed to be so high that it is never worthwhile.

I do not understand this:

"Is the marking to market always sufficient to guarantee that I dont face a loss on the futures contract? "

You could have mark to market losses no?

FDAXHunter · Post by **FDAXHunter** » Fri Aug 12, 2005 4:34 pm

[b]EVT:[/b] [i]Is the marking to market always sufficient to guarantee that I dont face a loss on the futures contract?[/i]

The mark-to-market has nothing to do with facing a loss. You can lose money on on the futures leg.

I suspect rather that you mean taking delivery?

The CBOT will make the buyer of the contract whole. If the short side doesn't deliver, the CBOT clearing house will go out and buy a bond and deliver it to the long. It will then bill the short accordingly. The 1% penalty does not go to long side, as they get their bond, so there is no problem from their side.

EVT · Post by **EVT** » Fri Aug 12, 2005 4:35 pm

Unfortunately teh article is subscriotion based so you're going to have to buy a copy of the WSJ Sad

You're right regarding the marking to market. Losses can occur. But I guess what I was really getting at is if I go long on the treasury future then come maturity time I will want to have bond...Once I have taken the delivery of the bond I may be able to make money on the bond depending on how bond prices will move afterwards. However, if the guy who shorts the treasury future contract fails to deliver me the bond how am I compensated from this....??

hooloovoo · Post by **hooloovoo** » Fri Aug 12, 2005 4:39 pm

Thanks. Found the article anyway.

Has there ever been a case (prolly in Europe) where the open interest in the contracts (after last trade date) was larger than the size of entire delivery basket? If yes would be interesting to see how the problem was resolved then.

EVT · Post by **EVT** » Fri Aug 12, 2005 4:39 pm

Thanks FDAX

EVT · Post by **EVT** » Fri Aug 12, 2005 4:47 pm

hooloovoo

thats what I was wondering as well

FDAXHunter · Post by **FDAXHunter** » Fri Aug 12, 2005 5:03 pm

Not aware that it ever happened and if it would the Treasury (or the Finanzagentur) would most likely simply re-open the deliverable issues.

hooloovoo · Post by **hooloovoo** » Fri Aug 12, 2005 5:16 pm

http://www.bis.org/publ/r_qt0106d.pdf

Pages 5 and 6 "The anatomy of a squeeze" has some information. It says 2 weeks before last trade date the open interest was 565k - 1.5 times the size of the basket. Bbg has that reducing to 348k which is a bit below the basket size. But that still would have caused an acute problem as it is likely that the entire size of these issues was not available for delivery.

But yeah the Treasury could simply reopen the issue. Could Eurex/CBOT say that the contract will be cash settled to the converted closing price of the bond? Is there a reason why they would choose to not do that in such situations?

jungle · Post by **jungle** » Fri Aug 12, 2005 5:16 pm

[i]the Treasury (or the Finanzagentur) would most likely simply re-open the deliverable issues.[/i]

pretty sure this happened in the UK in the late 90s, but i'm struggling to remember the date. will have a look and report back.