After allowing new products such as interest rate futures, currency futures and repo in corporate bonds, the Reserve Bank of India (RBI) has said that work is underway for introducing products like credit default swaps.
?The immediate effort would be to design prudent guidelines, a robust market infrastructure and strengthen the systemic monitoring framework. Such products are new for the Indian market and an assessment of their implication on other markets, institutional behaviour and system as a whole would be critical,?? said RBI deputy governor Shyamala Gopinath.
It has been argued that if banks are permitted to guarantee corporate bonds, the market may attract more interest. However, such a move will ultimately hinder the development of genuine corporate bond market and result in risk concentration within the banking system, which is not the purpose of market-based disintermediation process, she said.
RBI has adopted a cautious approach in its regulation of repos in corporate bonds. Going forward, RBI will monitor the performance of the repo market for corporate bonds once it becomes operational.
Recently, recognised stock exchanges have been permitted to offer currency futures contracts in three new currency pairs. Two exchanges have already introduced the pairs, which has increased the volumes greatly.
While the volume of trade in the currency futures has increased sharply, the open interest has remained low and stagnant and constitutes only a small percentage of the outstanding OTC contracts. The above trend reflects that the exchange traded markets are still not being used for hedging purposes by different participants. It is largely the day-traders taking intra-day positions and closing by day-end which dominate the market, she pointed out.
Explaining RBI?s reluctance to allow FIIs to trade in OTC market, she said it was not considered opportune to remove the requirement of underlying commercial transactions in the OTC market.
In response to the draft guidelines, many corporates and industry associations FEDAI and FIMMDA have represented that prohibiting cost reduction structures will seriously impede the dynamic forex risk management operation of corporates and that their competitiveness in the global markets, as their counterparts have flexibility in using such products internationally, she said.
Additionally, if such structures are banned, some corporates may not hedge their exposures due to costs, and this may result in aggregation of open currency risk in the system, which is riskier than allowing hedging within a range. she said.
?It has been suggested that structures may be allowed with safeguards, such as the pay off of such a strategy lies between an unhedged exposure and an exposure hedged through a forward contract, allowing the products only against underlying exposures, not allowing leverage structures, limiting to corporate with threshold turnover and net worth, etc,?? she said.