Capital market regulator Securities & Exchange Board of India (Sebi) on Wednesday released its report, compiled jointly with the Reserve Bank of India (RBI), on interest rate futures.
The futures contracts, which will be traded on the currency derivatives segment of recognised stock exchanges, will help firms manage risks arising out of interest rate fluctuations. The contract, which is essentially an agreement between two parties to fix an interest rate at which they will borrow or lend at a future date, will have an underlying of 10-year government security (G-sec) as the underlying asset.
?The notional coupon rate of the G-sec will be 7% with semi-annual compounding,? said RBI-Sebi Standing Technical Committee on Exchange-traded Interest Rate Futures that prepared the report.
The committee will meet periodically to sort out issues arising out of overlapping jurisdiction. Interest rate futures was first launched around five years ago but it did not take off.
?Introduction of Interest Rate Futures (IRF) is a significant reform measure that will go a long way in the development of the debt markets in India. This product would help the financial institutions to hedge the interest rate risk inherent in their underlying businesses. In addition, by virtue of being an exchange traded product, the entire household and corporate sector would also be able to hedge the inflation risk faced by them on a day-to-day basis. There are also the added benefits of standardisation and transparency in the product in addition to reduction in counterparty risks as these products are likely to be guaranteed by the clearing house,? B Prasanna, MD & CEO of ICICI Securities Primary Dealership Ltd.
The sizes of the contract will be of Rs 2 lakh, with maximum maturity period of 12 months, and the cycle will consist of four fixed quarterly contracts for an entire year, expiring in March, June, September and December.
The report stipulates that the gross open positions of a client across all contracts should not exceed 6% of the total open interest or Rs 300 crore, whichever is higher. At the trading member level, the limit is 15% of the total open interest or Rs 1,000 crore, whichever is higher. For foreign institutional investors (FIIs) and non-resident Indians (NRIs), gross long position in the debt market and interest rate futures must not exceed the maximum permissible debt-market limit prescribed from time to time.
Short position in interest rate futures must not exceed long position in the debt market and in interest rate futures.
The initial margin requirement will be based on a worst case loss of a portfolio of an individual client across various scenarios of price changes. The daily settlement price will be the closing price of the futures contract on the trading day, which, in turn, will be the weighted average price of the futures for the last half an hour.
Deliverable grade securities are those maturing at least 7.5 years but not more than 15 years from the first day of the delivery month, with a minimum total outstanding stock of Rs 10,000 crore.
The mark-to-market gains and losses will be settled in cash before the start of the trading on T+1 day. The trading hours will be from 9.00 am to 5.00 pm on all working days from Monday to Friday.
