Interest rate futures launched

NSE says trading in the segment will widen the country’d bond market.

Trading in interest rate futures (IRFs) was relaunched in the country On Monday after a gap of over six years. With this, the National Stock Exchange (NSE) became the first to launch trading in the segment ahead of the Bombay Stock Exchange (BSE), which has also been permitted by the capital market regulator to host the segment.

Interest rate futures are the first major product to be introduced in India after the launch of currency futures in August 2008. The volume in the currency futures segment has steadily moved up and crossed the combined daily turnover mark of $2 billion.

“Do not look for any major action in interest rate futures initially, but we are certain volumes in the segment will pick up eventually,” said NSE Managing Director Ravi Narain.

Narain also stated that the launch of interest rate futures trading would also widen the country’s bond market, and volumes in government as well as corporate bond market too would go up.

Currently, the share of IRFs in the global derivatives market in terms of volumes is 20 per cent.

Regulators have redesigned the contract after the first attempt to introduce IRFs failed in 2003 due to overly complex pricing system and banks, the biggest buyers of government securities, not being allowed to trade in the segment. The new contracts have been redesigned to make them more liberal and banks and foreign investors too have been allowed to trade.

On Monday 13,789 contracts were traded, with the heaviest volumes in short maturity from 12 pm to 5 pm. The three-month contract maturing on December 18 was trading at Rs 91.89 to yield 8.20 per cent.

The Rs 2,00,000 contracts each have been based on 10-year government bonds bearing a notional coupon of 7 per cent per annum, compounded every six months.

The earlier 2003 contract used a zero-coupon yield curve for determining the settlement price, a process that many found complex to grasp. Both the contracts ending in December 2009 and March 2010 generated a combined volume of 14,559. The total open interest stood at 1,940.

More than 10,000 contracts were struck in the December futures in the first two sovereign bond, carrying a notional coupon rate of 7 per cent with semi-annual compounding.