The underlying paper will be 10-year govt bonds.
India’s financial and capital regulators today set the ball rolling for exchange-traded interest-rate futures to provide a mechanism to institutions and households to hedge their interest-rate risks.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) said in a joint report on interest-rate futures that the contracts would have 10-year government bonds with a 7 per cent semi-annual, compounding, notional coupon rate as the underlying security. The size of a single contract would be Rs 2 lakh and the maximum maturity of the contract would be 12 months, it said.
| WHAT FUTURE HOLDS |
| * The size of a single contract will be Rs 2 lakh and the maximum maturity of the contract will be 12 months |
| * The gross open positions of a client across all contracts shouldn’t exceed 6 per cent of the total open interest or Rs 300 crore, whichever is higher |
| * The contract cycle will consist of four fixed quarterly contracts expiring in March, June, September and December. |
| * For a trading member, the gross open position shouldn't exceed 15 per cent of the total open interest or Rs 1,000 crore, whichever is higher. |
The contracts would be traded in the currency derivatives segment of a recognised stock exchange, the report said, adding that the cycle would consist of four fixed quarterly contracts expiring in March, June, September and December.
The gross open positions of a client across all contracts shouldn’t exceed 6 per cent of the total open interest (OI) or Rs 300 crore, whichever is higher. For a trading member, the gross open position shouldn’t exceed 15 per cent of the total OI or Rs 1,000 crore, whichever is higher.
No separate position limit has been prescribed at the level of clearing member. However, the clearing member has to ensure that his own trading position and the positions of each trading member clearing through him are within the limits specified above.
Interest-rate futures would allow market participants a system to gauge the effectiveness of different positions and strategies for managing their risks, the report said.
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Also, the system would provide transparency and eliminate counter-party risks by ensuring the guarantee of a clearing house, it added.
IDBI Gilt Vice President and Head of Treasury S Srinivasaraghavan said the interest-rate futures would provide depth to the market and contain high volatility.
The contract would be settled by physical delivery of deliverable grade securities using the electronic book entry system of the existing Depositories (NSDL and CDSL) and the Public Debt Office (PDO) of RBI.
The delivery of securities would take place from the first business day till the last business day of the delivery month. The clearing corporation would act as a central counter-party for all trades.
With this hedging instrument, said another bond dealer, banks would have more appetite for taking government bonds on their books. Generally, banks are hesitant to increase their bond holdings as they worry about spending more time on managing risks.
As a prudential step for dealing with risks associated with the trades, the panel has suggested imposition of margins. The initial margin requirement would be based on the worst case loss of a portfolio of an individual client across various scenarios of price changes.
The extreme loss margin of 0.3 per cent of the value of the gross open positions of the futures contract would be deducted from the liquid assets of the clearing member on an online, real time basis, the report said.