RBI push for Interest Rate Futures to boost trading

To attract traders even cash settlement has been permitted in IRFs by the regulator

The Reserve Bank of India (RBI)’s likelihood of launching more tenures in Interest Rate Futures (IRF) is set to drive trading volumes further. A senior official from RBI said last week this was being considered.

In December, the regulator made a third attempt to launch IRFs. The previous two attempts had witnessed a lukewarm response. RBI's definition of IRF is, "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”.

Data show the product, relaunched in January, had a combined average monthly turnover crossing the Rs 1,000-crore mark for the first time in April. To attract traders, cash settlement has been permitted in IRFs.

“If more tenures are launched in IRF, that should help overall to drive volumes. But prior to that, banks need to get their internal systems in place. The burden of success on IRFs is huge, as this time the regulators have pretty much given whatever the market had asked in terms of product design, cash settlements, etc. A lot of the large roadblocks have been taken care of,” said Brijen Puri, executive director and head of markets, JPMorgan.

It is learnt RBI is pressurising banks to trade in IRFs, due to which trading volumes are picking up.

Currently IRFs are permitted where the underlying product is a 91-day treasury bill, a two-year, five-year or 10-year coupon bearing government security. The Street says most are done with the 10-year security. “Besides helping to boost trading volumes, we can have a term curve even in the futures exchange if more tenures are launched,” said N S Venkatesh, chief general manager and head of treasury, at IDBI Bank.

IRFs were launched for a second time in August 2009. The earlier launch was in 2003. Both attempts had failed to attract traders, due to which there were meagre volumes.

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