Sebi allows 2 and 5 yr IRFs in G-secs

In order to help investors guard against interest rate fluctuations, capital market regulator the Securities and Exchange Board of India (Sebi) today introduced two-year and five-year exchange-traded IRFs (Interest Rate Futures) in government bonds.

"It has now been decided to permit the introduction of cash settled futures on 2-year and 5-year notional coupon bearing government of India security on currency derivatives segment of stock exchanges," the Sebi said, issuing the guidelines for the new instruments.

The Reserve Bank too has issued notification in this regard.

Earlier, the IRF, traded on currency derivative segment of stock exchanges, was allowed in 91-day treasury bills and 10-year government securities.

Investors purchase or sell IRFs to hedge risks arising from fluctuation in interest rates, which depend on various factors including RBI policy, demand for liquidity and flow of overseas funds.

As per the guidelines, the minimum lot size for such instruments should be Rs 2 lakh. Residents and foreign institutional investors (FIIs) can trade in these instruments.

India has an active government securities (G-secs) market where primary issuance is at market-determined rates.

The Sebi further said that in case of FIIs, the total gross long (bought) position in cash and IRF markets taken together should not exceed their individual permissible limit for investment in G-secs.

In November 2010 monetary review, the RBI had indicated that exchange traded IRFs on 5 and 2-year notional coupon bearing G-secs and 91-day Treasury Bills would be introduced after taking into account the experiences of cash-settled IRF regimes in other countries.

For hedging interest rate risk, besides the exchange- traded IRF, India also has a liquid and vibrant interest rate swaps (IRS) market.