Insurers, MFs await regulatory go-ahead for bond trading

Mutual funds and insurance firms are awaiting go-ahead from their respective regulators -- Sebi and IRDA -- with regard to their participation in the newly launched Interest Rate Futures (IRF) on stock exchanges.

All three national bourses -- NSE, BSE and MCX-SX -- launched trading last month in cash-settled IRF contracts, which are based on the benchmark 10-year government bonds, one of the most liquid debt paper instruments.

An IRF is a contract between a buyer and a seller for future delivery of an interest-bearing security such as government bonds.

Those allowed to trade in this segment include banks, primary dealers, mutual funds, insurance companies, FIIs, corporates and brokers, as well as retail investors.

While banks, corporates and brokerage firms have already begun trading in IRF, mutual funds and insurance companies are yet to do so and the overall IRF trading volumes have slumped after a robust beginning.

According to sources, mutual funds have sought clarity from Securities and Exchange Board of India (Sebi) with respect to definition of hedging while they have also asked for information on whether they would need to have the same underlying security for hedging purposes.

As yet, mutual funds have been permitted to trade in IRFs subject to disclosures made in the offer document about potential interest rate risks while trading in government securities or corporate bonds.

Insurance regulator IRDA is also working on draft guidelines to allow insurance companies to participate for IRF in the long terms government bonds.

IRDA has allowed insurers to trade in IRFs based on one-year tenure bonds for hedging purpose. However, the regulator is yet to finalise guidelines to provide flexibility to trade in 10-year government securities as well.

After witnessing a strong debut last month on the stock exchanges, IRFs have seen a sharp drop in volumes within just few weeks of their launch.

NSE Bond Futures, launched on January 21, had garnered more than Rs 3,000 crore in turnover on its first day. However, since then the daily volumes in the product have gone down by 86.8 per cent to Rs 406.65 crore, as on February 21.

On the BSE also, IRF daily turnover has plunged to Rs 14.15 crore, from Rs 467.86 crore on its first day. Volumes on MCX-SX also dropped sharply by 95.33 per cent to Rs 43.30 crore on February 21, from Rs 928 crore in first-day trade.

Market experts are of the opinion that this market is yet to stabilise and the IRF volumes are also likely to get a boost after mutual funds and insurers begin trading.

IRFs were launched twice earlier (in 2003 and 2009) but failed to pick up because of their complex structure.

In its latest avatar, the cash-settled IRF is being promoted as a hedging tool against interest rate risks.