Block to the futures: Notable expansion in futures trading using block trades and acceptance of non-cash collateral

The Thailand Futures Exchange (TFEX) has been operating since 2006 with a range of products including futures for the Stock Exchange of Thailand (SET) 50 Index, stock, gold, interest rates, currency and agriculture. The two most popular of these in terms of daily trading volume are SET50 Index and stock futures.

The trading volume of stock futures has increased substantially from around 969,000 contracts in 2010 to 47.5m in 2017, indicating greater investor awareness of these products. Contract investors can benefit from both bullish and bearish markets when it comes to futures, but a lack of liquidity in particular products, such as single-stock futures, may prevent some players from entering the market.

Block Trades

To make single-stock futures more useful instruments for investors, brokerage firms can utilise transactions called block trades. As they give investors the opportunity to trade stock futures at negotiable prices and quantities – and are executed apart from open outcry or electronic markets – these reduce the difficulty of opening and unwinding positions in single-stock futures contracts.

Stock futures have 93 underlying stocks. The increasing volume has mainly come from block trade transactions, which account for 80-90% of the total. If individual investors want to deal in stock futures but do not have sufficient liquidity, a brokerage firm can provide an authorised person to perform the deal. In this transaction the brokerage firm would be the counterparty to the investor, regardless of whether a short or long position is required.

Block trades require a minimum of 20 contracts per transaction if the price of the underlying stock is more than BT100 ($2.89) per share; if the underlying stock price is below this threshold, investors must have at least 100 contracts per transaction. Firms charge investors a negotiated interest rate as part of the transaction cost, which investors incur in addition to the commission cost. The interest rate cost will be charged on the date that the position in the futures contract is closed, in accordance with the number of days the futures contract was held. The interest rates differ depending on the type of position: brokerage firms charge 7% interest on long positions and 8% on short ones.

In addition to individual investors, institutional investors can benefit from block trades. For instance, a hedge fund holding a large position in a company may wish to sell its entire stake. If this were put into the market as a large sell order, this would necessarily cause the price to drop sharply – a stake large enough to affect supply and demand will have an impact on the market. To avoid this, the fund may arrange for a block trade with another company through an investment bank, which would benefit both parties: the selling fund gets a more attractive purchase price, while the purchasing company can negotiate a discount off the market rates. Unlike the case of large public offerings, for which it often takes months to prepare the necessary documentation, block trades can be carried out at short notice and closed quickly.

Non-cash Collateral

In the futures market, a margin is the amount of cash that an investor must put up to open an account and begin trading activities. Collateral is also a necessary element for futures, serving as a buffer against volatility. TFEX has accepted cash guarantees since its inception, with the amount depending on the value of the product being purchased. The necessary assurance for futures changes constantly due to market fluctuations. Breaking with its previous tradition, TFEX began accepting non-cash collateral for futures products on April 23, 2018, allowing investors to use existing securities in their portfolios. This constitutes a significant change in TFEX’s operations, allowing investors more flexibility in terms of asset management, as they no longer have to worry about transferring money into their accounts if their collateral is wiped out. (sienagolfclub.com)