Canadian trading venue the Montreal Exchange, part of TMX Group, has launched mini-futures contracts based on the S&P/TSX 60 Index. The new SXM contract represents one-quarter of the value of current S&P/TSX 60 Index Standard Futures (SXF).
The new small notional size SXM futures are aimed at traders who prefer a lower cost of trading, hedge funds who prefer lower margin requirements, arbitrageurs who conduct cross-market arbitrage trading, and retail investors who want to speculate on the Canadian equity marketplace.
Portfolio managers benchmarked to the S&P/TSX 60 Index and currently using OTC index derivatives will now be able to hedge their risk exposure with SXM futures. Market participants will also be able to arbitrage the market by trading the spread between the SXF and the SXM futures contracts.
The introduction of the new smaller SXM futures means institutional investors can free up capital while maintaining equity market exposure, by using exchange for physical (EFP) transactions to exchange a portion of their stock holdings against SXM futures, or vice versa.
An EFP is a transaction in which the trader sells stock and buys it back for future delivery by buying a single stock future, or buys the stock and sells the single stock future. EFPs allow trades to swap a long or short stock position for a single stock future, combining the two into one transaction.
The Montreal Exchange is part of TMX Group, which also operates the Toronto Stock Exchange (TSX) and the TSX Venture Exchange, which targets small and medium enterprises. TMX is currently working on a merger with the London Stock Exchange Group; the deal remains subject to regulatory approval.