Interest rate futures weekly turnover crosses Rs 1,000 crore

It’s a case of third-time lucky for interest rate futures (IRF), a derivative product that allows investors to take bets on the direction of the 10-year benchmark government securities.

The product, launched in January for the third time, is beginning to catch investors’ fancy. The combined average weekly IRF turnover crossed Rs 1,000 crore for the first time last week.

The product, this time, was designed considering keeping in mind the market demand, said experts. The regulators, for the first time, have allowed an IRF contract to be cash-settled and have also allowed wider investor participation.

Unlike the previous two occasions, when the product had completely failed to take off, the average weekly IRF volumes have been more than Rs 500 crore since its launch two months earlier. “If there is participation from insurance companies, mutual funds (MFs) and more public sector banks, it should do even better,” said N S Venkatesh, head of treasury at IDBI Bank.

MFs, insurers and foreign institutional investors have yet to participate in the IRF market. “At present, only the primary dealers and banks are mostly active. We haven’t seen MFs participate; there a lot of clarity required on whether they can hedge. Similar approvals are required for insurers. Also, there are some interpretation issues for FIIs which is preventing their participation. Basically, the product right now is in a clarificatory mode,” said Ashish Ghiya, managing director, Derivium Capital & Securities.

Ghiya said one will get better understanding about how the product is doing by July, once all the participants are on board.

Industry sources said more than a fourth of the volumes come from non-institutional investors, who are using this product to speculate on the interest rate movements.

The IRF turnover is primarily concentrated on the instrument with the 10-year benchmark as underlying as its the most liquid debt security.

Also, the bulk of the turnover is seen on the National Stock Exchange (NSE), with the turnover on BSE and MCX-SX dropping to below Rs 100 crore last week.