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ICE’s Long Gilt futures: 40 years as a benchmark for U.K. sovereign bond markets

As a liquid safe-haven, the role of gilts has come to the fore amid macroeconomic uncertainty


November 14, 2022

Matthew Horton Headshot
Matthew Horton
Head of Interest Rate Derivatives

In the three hundred-plus years since King William III issued the first gilts, it’s a point of pride for the United Kingdom that not a single payment has been missed.

Gilts’ reputation as a safe-haven, highly liquid asset is globally renowned.

Here at ICE, we are equally proud of our gilt futures, which on November 18, 2022, celebrate their 40th anniversary of trading.

ICE’s Long Gilt futures contract has become the benchmark for the UK government bond yield curve and is increasingly important to traders for managing portfolio risk, especially against the backdrop of recent political and economic uncertainty.

Aggregate volumes and open interest have shown consistent and steady growth over the last four decades, in charts that visibly trace the economic events affecting the UK and the wider world.

ICE Long Gilt Futures

Volume & Open Interest Growth (2000-2022)

Source: ICE Data Services

The Long Gilt futures contract was launched in 1982 at the London International Financial Futures and Options Exchange (LIFFE) which was later acquired by ICE. One of LIFFE’s founding executives Phil Bruce, says the contract was designed to resemble U.S. Treasury Bond futures but tailored to the requirements of the underlying gilt market.

“In its early years, it all happened in a pit on LIFFE’s trading floor in the Royal Exchange – a space occupied by brokers, market makers, representatives of banks, and discount houses – all in colourful jackets and shouting at the tops of their voices,” Bruce says.

“Ever since, the Long Gilt futures contract has grown to become the internationally recognised, reliable and deeply liquid bellwether for long-term sterling interest rates.”

The past forty years have certainly seen their share of economic stress — from the collapse of the exchange rate mechanism to the establishment of the euro, and from the global financial crisis in 2008 to Brexit and COVID.

Even in recent months, as global markets reacted adversely to the UK government’s tax-cutting mini-budget, ultimately triggering intervention by the Bank of England, it was the gilt futures markets that provided the liquidity to trade risk.

At every moment, no matter the stress and volatility in markets, the Long Gilt futures contract was available for trade, with an average daily volume (ADV) in 2022 of 267,000 lots representing more than £26 billion of notional value traded each day.

The highest average daily volume ever seen was more than 1.9 million lots in February 2021, reached as the UK government was announcing plans to ease COVID lockdowns across the country.

Institutions use the Long Gilt futures contract for three main purposes — (1) it provides a way of protecting portfolios against unfavourable price movements and monetary policy changes, (2) it allows trading strategies that can improve yield and portfolio returns, and (3) it is flexible enough for investors to trade price volatility.

Importantly, it works for these purposes because it is liquid and inexpensive.

Pension funds use futures to ensure they can predictably meet their liabilities as members retire, without being subject to unforeseen swings in interest rates.

With working people in the UK contributing to their pension, the pension funds get a constant inflow of money to manage but expressing a view on the trading outlook by buying and selling bonds can be expensive.

Futures allow institutions to hedge or gain exposure to interest rates in a cost-effective way.

Gilt futures are underpinned by physical delivery.

There are rules about what kinds of bonds qualify for delivery — and some maths about how different bonds qualify for delivery — but the essence is that every quarter, delivery is made in UK government-issued bonds.

To be sure, most traders don't go to delivery, instead rolling to a future contract.

But the key is the utility of a future that is deeply connected to the real-world, fixed income economy.

Interest rates are at the core of our financial lives, from pension funds to personal loans and this is what drives the bond markets.

And it’s why the Long Gilt futures contract is such an important data point.

Bonds are fundamentally messy, with issues and re-issues and secondary market trading – but for forty years now, ICE’s gilt contracts have offered a uniform, accessible piece of data as to how the market is trading.

And because the contract has grown from strength to strength, it has become a key barometer for how the UK economy is performing.

ICE’s Long Gilt futures contract trades as part of the larger interest rate derivatives product portfolio, which includes benchmark Euribor, SONIA and SARON futures. The latest addition to the alternative rate complex is SOFR, the Secured Overnight Financing Rate, which replaces USD LIBOR.

All these futures play an important role in price discovery and the structure of interest rate curves. To trade and hedge these rates at ICE, contact [email protected].