Market rumours indicate that some of the deals had been pre-closed. The terms of the deals as well as the documents to be exchanged had already been agreed to and the counterparts were awaiting only the formal circular from the RBI to put the deals on their books. A bit like kerb trading!

In any case, the tally at the end of the day was about 20 deals done for a total value of approximately INR 2 billion (US$ 46 million). The majority of deals were done for tenors below six months, but a few deals went out as far as twelve months. Significantly, almost the entire volume of customer transactions done was accounted for by only threecorporates. These early corporates took full advantage of the banks' urgency to show deals on the first day and extracted fine prices. On a mark-to-market basis these deals are already profitable from the client's perspective and are likely to become more so as the market settles to a stable trading level.

It is heartening to note the speed at which the OTC market embraced the IRS. The Fixed Income Money Markets & Derivatives Association (FIMMDA) has played no small part in pushing for the development of this product. Forty industry participants formed this self-regulatory organisation last year with the objective of collectively expressing their views on market development and standardising market practices. The governor of the RBI then indicated in his mid-term credit policy statement that the central bank was in principle supportive of the need to introduce IRS as a mean of hedging interest rate risks. Draft guidelines were circulated on April 26, 1999 for discussion purposes and final guidelines issuedlast week.

The IRS is an agreement between two counterparts to exchange their interest rate risks. For example, one of the parties may decide to fix his interest rate in absolute terms, while the other may want a rate which fluctuates with daily demand-supply in the money markets (i.e. a floating rate). They may then enter into an IRS in line with their interest rate preferences.

A prerequisite for the interest rate swap is a means of independently determining the floating rate, or the benchmark. In the local market, the benchmarks emerged with the support of Reuters and the National Stock Exchange (NSE). They took upon themselves the onus of collating and computing a Mumbai Interbank Overnight rate (MIBOR). Both take into account quotes from between 26-32 banks and publish a benchmark (weighted average) that is transparent as well as independent. There is no significant difference between the two. One could conceivably use any number of other benchmarks such 3-month Government of India Treasury Bills ora specified bank's prime lending rate or a specified company's commercial paper rate. The only requirement is that they should be clearly determinable in future.

The IRS is a very basic tool of the derivative toolkit and forms the foundation for other complex derivative offerings. Internationally, the total estimated notional amount of outstanding interest rate instruments is in excess of US$ 47 trillion, and account for about 67 per cent of total outstanding OTC contacts (BIS figures as at end-June 1998). The market is also growing at an astounding 30 per cent per annum. The Indian money market is among the more developed in the world. With outstanding Government of India (GOI) securities of US$92 billion, some of which extend to tenors of 30 years and corporate/ financial institution bonds of another US$ 20 billion, the potential stock available for trading is large.

Secondary market turnover in the government securities market in the first quarter of current fiscal was US$ 16 billion. IRS is a flexibleinstrument that can be used to unlock value in bond and loan portfolios and can also substitute for trading in the actual bonds themselves. Turnover in these instruments will increase rapidly as their tenor gets extended to three years and beyond.

(The author is treasury head in a leading foreign bank)