Canadian Derivatives Exchange*

Basis Trade on Close (BTC) Functionality

BTC in a Nutshell

The Basis Trade on Close (BTC) functionality allows participants to trade the future at a price equivalent to the official close of its underlying cash market plus a predetermined agreed-upon price differential (positive or negative) known as "the basis".

The basis of an equity trade is a function of the expected dividends, carry cost, and time to maturity. Because BTC is quoted as the price differential between the future's price and the spot price (either the index constituent basket or the single-share), this price differential can be either positive or negative.

BTC provides the possibility to buy and sell S&P/TSX 60 index futures or share futures using the market end-of-day closing price of the underlying as a reference price. Orders can be posted at any moment during the regular market hours, offering an additional tool for investors in search of an efficient way to hedge their market exposure. This solution further optimizes Canada's equity markets while inherently reducing the gap with OTC markets.

Investors facing daily inflow or outflow of capital (in the form of new investments, dividends or withdrawals) usually receive or distribute it by the end of the day. In order to avoid a drag on their fund returns ("tracking error"), portfolio managers can easily use a market on close (MOC) order to equitize this new money, aligning their execution prices with that of market closes. However, without a BTC facility, no efficient or seamless way is available to hedge their end of the day price risk exposure using a traditional futures contract. To solve this challenge, BTC combines the advantages of a market on close type of order with the hedging capacity of index futures or share futures contracts in a unique functionality.

BTC Example

A Canadian mutual fund manager benchmarked against the S&P/TSX 60 index receives the information that by the end of the day, her fund will receive a cash inflow of $1M. She wants to make sure that this inflow of money will be equitized as soon as possible to minimize the fund's tracking error.

At 11:30 a.m., the S&P/TSX 60 index is quoted at 900.13. After calculating what she considers the right basis, she posts a bid to buy five (5) S&P/TSX 60 futures contracts at a basis of -$3.00 against the closing level of the S&P/TSX 60 index for the day. If a counterparty seeking to open a short position agrees on this basis in the S&P/TSX 60 index futures contract, a match occurs and a BTC trade is published in the BTC book.

At the close of the cash market, the S&P/TSX 60 index is quoted at 901. Subsequently, the Bourse platform calculates the BTC price on the S&P/TSX 60 index futures contract as 898 (901-3.00) and allocates a long position of five (5) contracts to the portfolio manager and a short position of five (5) contracts to the counterparty at the future price of 898.

In addition to equity financing, the BTC facility can also improve the experience for index arbitrage traders, market makers, institutional swap desks, brokers on the stock loan business and index options traders seeking to hedge their equity exposure. By serving as an organized market for index futures and share futures basis risk, BTC provides an important price discovery space, facilitating the transition between cash and derivatives that replicate index exposure.

Useful Information

Product Specifications

The information contained in this document is for information purposes only and shall not be construed as legally binding. This document is a summary of the functionality specifications which are set forth in the Rules of Bourse de Montréal Inc. ("Rules of the Bourse"). While Bourse de Montréal Inc. endeavors to keep this document up to date, it does not guarantee that it is complete or accurate. In the event of discrepancies between the information contained in this document and the Rules of the Bourse, the latter shall prevail. The Rules of the Bourse must be consulted in all cases concerning functionality specifications.

The S&P/TSX 60 Index is a product of S&P Dow Jones Indices LLC ("SPDJI") and TSX Inc. ("TSX"). Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and TSX® is a registered trademark of TSX. SPDJI, Dow Jones, S&P and TSX do not sponsor, endorse, sell or promote any products based on the S&P/TSX 60 Index and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions or interruptions of the S&P/TSX 60 Index or any data related thereto.