Prior to the start of Exchange Traded Interest Rate Futures on Monday (August 31), the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) issued various guidelines pertaining to eligibility of trading and settlement.
While trading would start on the National Stock Exchange from Monday, the Bombay stock Exchange is expected to start in September.
RBI note
In a note to all scheduled commercial banks, primary dealers, urban co-operative banks, non-banking finance companies and specified all-India financial institutions, the RBI stated that it had been decided to introduce interest rate futures on a notional coupon bearing ten-year Government security. Standardised interest rate futures contract would have some other features also.
Notional coupon will be 7 per cent per annum with semi-annual compounding; the contract will be settled by physical delivery of deliverable grade securities using the electronic book entry system of the existing depositories, namely, National Securities Depositories Ltd. and Central Depository Services (India) Ltd. and Public Debt Office of the RBI.
Securities
Deliverable grade securities will comprise government securities 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.
Interest rate futures means a standardised interest rate derivative contract traded on a recognised stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.
“Foreign institutional investors, registered with SEBI, may purchase or sell interest rate futures, subject to the condition that the total gross long (bought) position in cash and interest rate futures markets taken together does not exceed their individual permissible limit for investment in government securities and the total gross short (sold) position, for the purpose of hedging only, does not exceed their long position in the government securities and in interest rate futures at any point in time,” the RBI said.
Eligibility
The SEBI stated that interest rate derivative contracts would be traded on the currency derivative segment of a recognised stock exchange.
Members registered with Securities and Exchange Board of India for trading in the currency/equity derivative segment will be eligible to trade in interest rate derivatives also, subject to meeting the balance sheet net worth requirement of Rs. 1 crore for a trading member and Rs. 10 crore for a clearing member.
Deliverable grade securities will comprise government securities
Contracts will be traded on the currency derivative segment
