Worries about liquidity holding back growth, say players.
Volumes in interest rate futures (IRF) have failed to pick up. The market has been operational for nearly a year. According to the latest data released by the market regulator, April-June saw volumes dip to a paltry Rs 46 crore.
Experts say uncertainty over liquidity of the underlying bonds is holding back players from venturing into this space.
According to a report by the Securities and Exchange Board of India (Sebi), the turnover on the IRF platform dropped 84 per cent sequentially between April and June.
“During the quarter under review, volume fell 84.04 per cent, while turnover decreased 84.01 per cent over January-March,” says the Sebi report. In absolute terms, 2,501 IRF contracts were traded between April and June, with the total value a paltry Rs 46 crore. This is significantly lower than the 15,668 contracts with a value of Rs 287.6 crore that were traded between January and March.
At the end of the last trading day, open interest in terms of the number of contracts decreased 17 per cent while in value terms, it fell 14.8 per cent during the June quarter over the previous quarter, according to Sebi. Total delivery during the month, as a percentage of open interest on the first day of the delivery month (June), was 71 per cent, signifying that a large proportion of open interest subsisting on the first day of the delivery month resulted in delivery of government of India bonds.
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Experts say the joint technical committee set up to frame the guidelines and the contract specifications for the IRF market will soon have to tweak the current structure to make it more attractive for market players. The technical committee has representations from Sebi and the Reserve Bank of India.
“The easiest solution will be to settle the IRF contract on a specified underlying, which needs to be mentioned at the time of entering into the contract,” says Susan Thomas of the Indira Gandhi Institute of Development Research. “This will remove the element of uncertainty.”
Another bond dealer, who did not wish to be named, says the common concern among marketmen is that they could get “hit” with illiquid bonds. “If you take delivery, there is always this fear of ending up with bonds that cannot be sold. If you look at some of the overseas markets, the dealers can sell the bonds they don’t like. This is not the case in India, where the underlying market is not liquid,” he explains.
According to data with the National Stock Exchange, the only exchange to offer trading facility in IRF, only one contract was traded in the IRF segment on most days in August, with average value of less than Rs 2 lakh.
The current regulatory framework allows participants to settle the contracts with delivery of securities with a tenor between nine and 12 years. Incidentally, the tenor of deliverable grade securities was fixed between 7.5 years and 15 years at the time the launch was launched.
“Currently, the responsibility of settlement is randomly assigned. One can deliver anything within the basket and one would tend to deliver the cheapest, which would also be the most illiquid,” says Thomas.