BM&FBovespa SA, the operator of Latin America’s biggest exchange, will start in March the trading of futures on the target lending rate that Ativa SA and Banco Plural said may replace overnight rate contracts.
The trading of the new contracts coincides with the overnight rate’s decoupling from the benchmark known as the Selic, eroding traders’ ability to bet on monetary policy. The rate that banks charge each other for overnight loans, known as the DI, has been more than a quarter-percentage point below the central bank’s 7.25 percent target for over a month.
“Today, the entire industry thinks of DI, but it makes more sense to have arbitrage with Selic, especially with the detachment of the overnight rate,” Arnaldo Curvello, Ativa managing partner and treasurer in Sao Paulo, said in a telephone interview. “Banks have assets in Selic as they invest in government securities, and liabilities in DI as they raise funds with instruments linked to DI. Contracts linked to Selic make more sense”
BM&FBovespa will begin trading on March 1 futures contracts on one-day repos backed by government bonds that traders will use to bet on the central bank’s benchmark. Traders will receive a 65 percent discount on registration and exchange fees when they exchange DI futures, also known as swap rates, for the Selic futures contracts over the next year, BM&FBovespa said in a Jan. 21 statement.
The speed of the market’s transition from the DI futures to the new contracts will depend on banks’ interest in the new instruments, Curvello said.
“Attention and liquidity could migrate toward those new contracts,” Mario Mesquita, a former central bank head of economic policy and partner at Banco Plural, said in an interview today in Sao Paulo. “DI futures and Selic futures tend to compete with each other.”