Panel moots Rs 200 crore net worth for interest futures trading

The Reserve Bank of India's committee on interest rate derivative yesterday recommended that banks wanting to trade in interest rate futures should have a capital adequacy ratio of 10 per cent and a minimum net worth of Rs 200 crore.

The committee headed by G Padmanabhan, a RBI regional director for Andhra Pradesh, also proposed banks should set up limits for trading in such products and get them approved by their respective boards.

"The committee felt that banks having adequate internal risk management and control systems and robust operational framework could be allowed to run trading positions across various interest rate derivatives including interest rate furtures," an RBI release said.

The entities should follow "mark to market" system for interest rate products for trading and should take the unrealised gains or losses to profit and loss of account, the report said.

The unrealised losses, which represent credit exposure, should be taken to "other liabilities" and be included in computation of net demand and time liabilities (NDTL), it proposed.

According to the report, the regulatory reporting format should reflect the interest rate risks of banks trading in interest rate products both for cash and derivative products.

The disclosure in the balance sheet should be made for replacement value of the contract and not their notional amount, it added.

Interest rate derivatives such as rate swaps and forward rate agreements were introduced in 1999. At the second stage, the RBI allowed banks and primary dealers (PDs) to transact in exchange-traded interest rate futures in June 2003.

While PDs are allowed to trade in these derivatives, banks can use them only to hedge exposures.

Volumes in derivatives have gradually been rising. According to the report, derivative transactions "" both in terms of no of contracts and outstanding notional principal amounts "" rose from 9633 contracts amounting to Rs 2,42,983 crore as on April 4, 2003 to 14,748 contracts for Rs 3,83,866 crore as on October 17, 2003.

Though there has been a significant increase in the number and amount of contracts, participation in the markets continues to remain restricted mainly to select foreign and private sector banks and a PD.

On the harmonisation of accounting treatment for futures, the report said the risk weightage for exposure to clearing agencies such as Clearing Corporation of India should be reduced from the current 100 per cent to 20 per cent.

The panel was constituted to study issues related to interest rate derivatives on an on-going basis August 7 last year.