Bourses get Sebi's approval to launch derivatives on bond indices

The Securities and Exchange Board of India (Sebi) has permitted stock exchanges to introduce index derivatives contracts based on corporate debt securities rated AA+ and above.

Sebi’s decision is aimed at enhancing liquidity in the bond market. It will also give an opportunity to investors to hedge their positions.

“To start with, the stock exchanges are permitted to launch futures contracts on corporate bond indices,” said Sebi, in a circular issued on Tuesday.

The stock exchanges will have to submit a detailed proposal to the regulator for approval. They will have to provide details related to underlying index, methodology, contract specifications, risk management, and trading, clearing and settlement mechanism.

Constituents of such an index will need to be corporate bond securities with adequate liquidity and diversification at the issuer level. There will also be a review of the constituents every six months.  

The index will need to have at least eight issuers, in which a single issuer will not have more than 15 per cent weight.

Furthermore, exchanges will not be allowed to have more than 25 per cent weight in a particular group of issuers in the index or from a particular sector.

However, public sector undertakings (PSUs), public financial institutions, and PSU banks are excluded from this threshold.

The trading hours for these indices will be 9 am to 5 pm on working days. The daily settlement price will be the last half an hour volume-weighted average price of the contract. Sebi said that the stock exchanges may introduce contracts of up to three years tenure.

The circular states that the contracts would be settled in cash in rupee. The expiry or last trading day of the contract will be the last Thursday of the expiry cycle, just like equity derivatives.

“The initial margin requirement shall be based on a worst-case loss of a portfolio of an individual client across various scenarios of price changes,” said Sebi.

The decision has been taken based on the submissions made by the working group and recommendations of the Secondary Market Advisory Committee (SMAC).