FIIs,banks can trade in interest rate futures

Our Bureau MUMBAI

THE Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) jointly unveiled norms enabling exchange-traded interest rate futures (IRF) on Wednesday.
    Interest rate futures are derivative contracts which have an interest bearing security as the underlying instrument. The introduction of this instrument will help banks, insurance companies, bond houses and provident funds manage risks arising from interest rate fluctuations in their fixed income portfolios.
    In a surprise move, foreign portfolio investors have been allowed to trade in IRFs, but limits have been put in place to keep their influence under check. The regulations, which were being developed by a joint committee of Sebi and RBI for over a year, also allow banks to participate in IRFs.
    "IRFs are a significant reform measure that will go a long way in the development of the debt market in India," said B Prasanna, MD & CEO, ICICI Securities Primary Dealership. "This product would help financial institutions hedge the interest rate risk inherent in their underlying businesses," he added. This is the second attempt to introduce IRFs. IRFs were launched over five years ago by the National Stock Exchange, but did not take off due to deficiencies in product design and banks not being allowed to trade in these products.
    The new IRFs are based on the yield-tomaturity (YTM) curve, which is used daily by traders for their calculations. To start with, futures contracts will be based on the 10-year government bond, with a semiannual coupon of 7%. There would be quarterly contracts and each contract will be worth Rs 2 lakh crore. Limits have been placed on gross-open positions of clients across all contracts at 6% of the total open interest or Rs 300 crore, whichever is higher. Dealers point out that the 10-year bonds have lost favour, as traders prefer securities of shorter duration. The benchmark bonds weren't traded on two of the three sessions this week.
    However, most dealers have praised the regulator for allowing FIIs and yet keeping their influence in check. As per the circular, the gross-long positions of FIIs in bonds and futures should not exceed their maximum permissible debt market limits.

SUBSCRIBE TO Free SMS Alerts on India Stock Markets
OR SEND SMS "ON WAY2TRADE  " TO 9870807070
|DisasterAwareness | Health | Insurance |  Forex| Commodities|

Earn decent money by receiving SMSes on your cell phone.  Free Signup!

Chat ways2invest wilint

Contact Me

Ways2Health YOGA FOR GREAT LEGS