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What actually is … a rollover?

Release date: 13 Aug 2014 | Eurex Exchange, Eurex Group

What actually is … a rollover?

As futures contracts periodically reach maturity, a transfer or “rollover” of positions from maturing contracts into new contracts is necessary otherwise one is required to fulfill the delivery obligations attached to a futures contract. A rollover is best practice in the futures market as usually only a small number of contracts go to delivery.

As opposed to equities, futures contracts mature. It is therefore important that futures traders close open positions prior to maturity in order to remain within a liquid contract or to protect the portfolio from the price impact which can arise as a consequence of maturity. The third Friday of the months March, June, September and December is the usual maturity day for equity-based futures contracts, the majority of interest rate futures usually mature at the beginning of these month.

Why is a rollover so important?

The rollover marks the period in which most traders transfer the open interest from the due contract into a new contract month. A rollover usually occurs within a certain period of days just prior to the maturity day. The market remains open until maturity but the majority of the open interest in a given futures contract is transferred to the next available month’s maturity during the rollover period.
Futures traders thus must adhere to this period in order to remain in a liquid market. Because, even though trading in the maturing contract continues until the maturity day, both volume and liquidity continuously decline in accordance with the increasing number of positions already rolled out to the next maturity. This can result in a decline of the quoted prices after the rollover, in turn making it difficult for traders to exit the market at the desired price level.
A rollover is extremely important; traders holding long-term positions in the market must remember to regularly conduct a rollover for their futures contracts. A number of futures brokers offer their customers an automatic rollover service. Futures traders should therefore make sure to check with their brokers for rollover guidelines and services.