SEBI and RBI to introduce Interest Rate Futures in India

Last year on February 28, 2008, SEBI and RBI in a joint meeting had decided to constitute a RBI-SEBI Standing Technical Committee on Exchange-Traded Currency and Interest Rate Derivatives. The Committee submitted its Report on Exchange-Traded Currency Futures on May 29, 2008.Now the RBI-SEBI standing technical committee on exchange interest rate futures has come up with the operational guidelines for the introduction of physically settled interest rate futures contract based on 10-year notional coupon bearing Government of India (GoI) security. Members registered with the Securities and Exchange Board of India (SEBI) for trading in currency/ equity derivatives will be eligible to trade in interest rate derivatives also, subject to meeting the balance sheet networth requirement of Rs 1 crore for a trading member and Rs 10 crore for a clearing member. 

Why Interest Rate Futures?

The report also states that the need for Interest Rate Futures arise from the fact that banks, insurance companies, primary dealers and provident funds bear a major portion of the interest rate risk on account of their exposure to government securities. As such these entities need a credible institutional hedging mechanism. In this context, therefore, it is important that the financial system provides interest rate risk management tools through Exchange-Traded interest rate derivatives.

Benefits: - 

The committee has identified the following as the benefits of Exchange-Traded Interest Rate Derivatives

· Standardization – Through standardization, the Exchanges offer market participants a mechanism for gauging the utility and effectiveness of different positions and strategies.

· Transparency – Transparency, efficiency and accessibility is accentuated through online real time dissemination of prices available for all to see and daily mark-to-market discipline.

· Counter-party Risk – The credit guarantee of the clearing house eliminates counter party risk thereby increasing the capital efficiency of the market participants.

Product design and other details:-

The notional coupon on the underlying 10-year GoI security would be 7 per cent with semi-annual compounding. The size of the interest rate futures contract would be Rs 2 lakh and the maximum maturity of the contract would be 12 months. The contract cycle would consist of four fixed quarterly contracts for the entire year, expiring in March, June, September and December.

A copy of the report is available here.