Sebi, RBI aim to boost interest rate futures trading

Concerned with stagnating IRF volumes, the regulators are preparing a fresh set of norms to boost liquidity

Interest rate futures (IRF) are performing better compared to its previous two avatars but regulators are looking at providing further fillip to the derivative product.

Concerned with stagnating IRF trading volumes, capital market regulator Securities and Exchange Board of India (Sebi), in consultations with other regulators, including the Reserve Bank of India (RBI), is preparing a fresh set of guidelines to boost liquidity.

Some of the new measures include introducing more underlying and ironing out issues related to participation by insurance companies and mutual funds.   The combined daily average trading volume of IRF has come off from Rs1,100 crore in April to around Rs700 crore this month.

Regulatory bodies including Sebi, RBI and Insurance Regulatory and Development Authority (Irda) have taken notice of the drop in volumes in IRF,  a derivative product that allows investors to bet on the direction an underlying government security.

According to sources, Sebi has formed a panel to look into issues that are plaguing development of the IRF market and studying the feasibility of issuing more underlying securities.

Currently, IRFs derivatives are based on two underlying — the 10-year benchmark government security (G-sec) and the 91-day treasury bill. Bulk of the volumes, however, are seen in the 10-year G-sec. The central bank is exploring the possibility of introducing more securities across maturities.

Earlier this month, Sebi had also sought comments from the stock exchanges and markets intermediaries on deepening the IRF market. IRFs are traded on BSE, MCX-SX and the National Stock Exchange, the market leader. The exchanges had stated more underlyings could deepen the market.

“We have requested the regulator for broader definition of hedge for managing our interest rate exposures,” said a fund house official.

Exchanges have also requested the regulator to expand the ambit of hedging and allow institutional investors to do their own risk management. “Participation of insurance companies in IRFs hasn’t taken off as Irda is yet to issue a circular to provide more flexibility to insurance companies for participation in IRFs,” said an exchange official.

Non-banking financial institutions have also asked the regulators to clarify the definition of hedging with context to trading via the hedging tool. “The difference in lot sizes of underlying G-secs leads to less liquidity in future market. This situation makes hedging and executing cash-carry arbitrage difficult for institutional participants,” said an institutional investor.