The methodology reduces distortion in the yield curve

Starting Monday (the 12^th), DI future contracts traded on B3 will start using a new way of calculating settlement prices.

The new model will use the methodology known as VWAP (Volume-Weighted Average Price), which corresponds to the volume weighted average of the prices of trades carried out between 4:10 pm and 4:20 pm. By implementing this model, there will no longer be an electronic closing auction, previously held at 4:10 pm, which will optimize the daily routine of desk traders.

“The change meets a market demand since the market believes that this would provide a greater alignment between pricing and the yield curve by using average trading prices of all maturities at the same time,” says Luís Kondic, B3’s Listed Products and Data officer.

In addition to eliminating these price distortions in the yield curve, the VWAP approach reduces the need to use theoretical models for pricing (fallbacks), allows more continuous market time, more efficiency for related markets (e.g.: NTN-B), and allows for possible arbitrage between maturities.

Understand VWAP: The Volume-Weighted Average Price (VWAP) is used to balance the average price withing a given period by the trading volume. The algorithm avoids price distortions even in high volatility scenarios. 

On the page dedicated to this delivery, in our roadmap, you can find presentations, videos, and supplementary materials with all the details of this implementation.