Sebi to allow launch of derivatives based on two- and three-year bonds on a cash-settled basis.
The Securities and Exchange Board of India (Sebi) will soon introduce new products in the sagging interest rate futures (IRF) segment. The coming months will see the regulator launch derivatives based on shorter-tenure bonds that can be cash-settled.
According to people familiar with the development, the regulator will give its go-ahead for derivatives based on two- and five-year bonds as underlying. The joint technical committee, comprising officials from Sebi and the Reserve Bank of India (RBI), are deliberating on the specifications of the instrument and a decision is expected in the next two-three months. More important, the new contracts will be allowed to be settled in cash, which has been a long-standing demand of industry participants.
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Interest rate futures are an exchange-traded derivatives instrument for hedging against interest rate risk. Currently, only the National Stock Exchange (NSE) offers trading facility in IRFs, which were launched for the first time in 2003 and then again in 2009 but failed to click.
“It is felt that there is a need for shorter duration instruments that can be settled in cash,” said a person privy to the regulatory developments. “Bonds with a residual maturity of two and five years can be factored in while determining the settlement price of the new contracts. The industry has been asking for such products and the policymakers are hoping that it will provide new life to the IRF segment,” he added.
Interestingly, the regulators would indeed be keeping their fingers crossed after the new products are launched as all the previous attempts of infusing life in the segment have proved futile.
NSE has been registering almost nil volumes for many months now. According to market players, the prime reason for the failure of this segment is that banks are staying away from it. While the over-the-counter (OTC) market sees huge participation from foreign and private sector banks, the exchange platform has not been able to attract the same players.
“These (exchange-traded IRF) instruments do not fit in the risk appetite of public sector banks, while foreign and private banks do not want to get in the standardised exchange product,” says a fixed income dealer with a domestic brokerage. “The market has totally shunned these instruments and the current environment do not guarantee any success for the new products too. No one is willing to bet on rates on account of inflation and high borrowing,” he explains.
Initially, the IRF segment was launched with futures on 10-year government bonds. The contracts were allowed to be settled with delivery of government securities with a tenor between nine and 12 years. The segment, however, failed to enthuse market participants with the biggest fear being that of dumping of illiquid bonds.
Market players want the entire segment to be moved to cash-settlement basis, a demand that the capital market regulator is looking into. Thereafter, in July this year, 91-day treasury bill futures contract were launched on cash-settlement basis that fizzled out in just a few days.
