Sebi provides clarity on Interest Rate Future requirements

Markets regulator Sebi on Tuesday provided more clarity on Interest Rate Future (IRF) as part of easing the trading requirements for investors.

In IRF contracts, position limit linked to open interest would be applicable at the time of opening the position.

Now, subject to certain conditions, the particular open interest position can be continued even if the total open interest falls below the stipulated level.

With a view to ease trading requirements in IRF contracts, Sebi has provided clarity on certain aspects related to such contracts.

Open positions would not have to be "unwound immediately by the market participants in the event of a drop of total open interest in IRF contracts within the respective maturity bucket", the regulator said in a circular.

According to Sebi, such market participants would not be allowed to increase their existing positions or create new positions in the IRF contracts of the respective maturity bucket till they comply with the applicable position limits.

However, stock exchanges would have the freedom to direct the entities to bring down their open interest positions in IRF contracts after taking into consideration risk management factors.

"... In view of risk management or surveillance concerns with regard to the positions of such market participants, stock exchanges may direct them to bring down their positions to comply with the applicable position limits within the time period prescribed by the stock exchanges," the circular said.

Trading in IRF is cash-settled and is based on the benchmark ten-year government bond, one of the most liquid debt paper instruments in the country.

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

The product provides market participants with a better option to hedge against risks arising from fluctuations in interest rates.

Market participants like banks, FPIs, insurance companies, corporate houses and NBFCs can also trade in this product.