Banks request NSE for early launch of exchange traded futures

Banks have asked the National Stock Exchange (NSE) for an early launch of exchange traded futures so as to have enough products in the market to hedge their investment portfolio.

This measure assumes significance in the light of the fact that most of the banks are running into depreciation losses in their investments in gilts and other fixed income instrument in line with the rising yields in the government securities market.

The yield on the ten-year benchmark 7.37 per cent 2014 has gone up by 150 basis points since the beginning of the fiscal and is currently at 6.50 per cent.

The Fixed Income and Money market Dealers' Association, the self-regulatory organisation, along with representatives from banks had a meeting with NSE officials on the matter.

Bankers feel that exchange traded futures will not only help them to tide over the current volatility, it could be used for better risk management in future in the context of the new Basle II norms, said a banker.

While banks feel that its time for NSE to launch the product as interest rate is highly volatile, NSE seems to be waiting for the Reserve Bank of India to allow banks to trade in exchange futures along with hedging their portfolio, said a banker.

This is because, if banks are not allowed to trade, there are fears that the volumes will be too as there will be only buyers of the product in large quantity.

On the other hand, primary dealers who are qualified to be the trader and market maker in the product have very less capital base and thus turnover will be affected, added the banking source.

The RBI had agreed in principle to the proposal to allow banks to trade in the product and in its draft guidelines, it has asked for feedback from the market players. However it is yet to be formally put in place as a notification.

Meanwhile, the methodology for calculating the futures on the basis of zero coupon bond yield as proposed in the earlier framework has been down away with .

To this effect, the Securities and Exchange Board of India has brought out guidelines specifying market yield to the basis for calculation.