Leading bourses NSE and BSE are ready to start trades in interest rate futures (IRFs) on 10-year government securities later this month, which will be another landmark in the financial sector reform measures aimed at helping investors hedge risks of money market volatility.
While the NSE is scheduled to launch the bond futures trade on January 21, the BSE is planning it on January 28, senior officials of the bourses told FE.
Globally, the market size of interest rate derivative contracts, such as IRFs, options and swaps, are much larger than all other derivatives, including equities and commodities taken together. While the total gross market value of all derivative contracts was $20.16 trillion as on June 2013, interest rate derivative contracts accounted for three-fourth of it at $15.16 trillion, according to latest estimates of Bank for International Settlement (BIS). Unfortunately, interest rate derivatives are absent in India and investors had no recourse to hedge risks despite volatility in the money market due to a variety of reasons, ranging from government?s bloated market borrowings, RBI rate revisions, liquidity crunch to the US Fed?s taper plan.
Last year, RBI governor Raghuram Rajan outlined the need for IRFs in India soon after he took charge. After the basic framework for IRFs were framed, Sebi allowed bourses to design the product.
BSE CEO Ashish Kumar Chauhan said his bourse would launch the IRFs on January 28.
?We will formally launch the bond futures on January 21,? an NSE official said. In separate communiques to their respective members, both NSE and BSE said the futures contract will be based on two 10-year government securities ? 8.83% GOI 2023 and 7.16% GOI 2023.
The permitted lot size is a minimum Rs 2 lakh on the face value of a gilt equivalent to 2,000 units. The contracts will expire on the last Thursday of every month. While the operating price range is set at plus/minus 3% of the base price, the exchange can expand the price band by 0.5 percentage points after taking into account the market trend.
In case of FIIs, BSE has put in some restrictions including that gross open positions of the FII across all contracts can?t exceed 10% of the total open interest or Rs 600 crores, whichever is higher. ?The total gross short (sold) position of each FII in IRF shall not exceed its long position in the government securities and in IRF, at any point in time. The total gross long (bought) position in cash and IRF markets taken together for all FIIs shall not exceed the aggregate permissible limit for investment in government securities for FIIs,? it said.
Market intermediaries could not predict what kind of volumes IRFs will generate in India initially.
?There will be a appetite from the sell side more than buy side initially because investors and traders who have taken long positions would want to hedge their positions. It may take six months for this segment to pick up,? said A Prasanna, chief economist of ICICI Securities Primary Dealership. Once FIIs enter the market to hedge their bond holdings and also trade, the market may pick up momentum.
Care Ratings chief economist Madan Sabnavis is not so optimistic. ?Initially only banks and bond traders will be participating in this segment. Then corporates susceptible to interest rate risks may like to join. For retail borrowers, its a long long way,? he said.
While the market needs to have IRFs of various tenures and not just 10-year one, Sabnavis said this was not possible in near term. ?Only 10-year and 5-year G-suit trade actively. If you don’t have the underlying security, it will not help in launching Ifs for other maturities,? he added.
