RBI introduces cash settled IRF on 10-year Government of India security

The Reserve Bank of India (RBI), as announced in the Second Quarter Review of Monetary Policy 2013-14, has decided to introduce cash settled Interest Rate Futures (IRF) on 10-year Government of India security. The IRF deriving value from 91-Day Treasury Bills, 2-year, 5-year and 10-year coupon bearing notional Government of India security, and coupon bearing Government of India security are permitted on the recognised stock exchanges.

Interest Rate Futures means a standardized interest rate derivative contract traded on a recognized stock exchange to buy or sell a notional security or any other interest bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract.

Persons resident in India are permitted to purchase or sell IRF both for hedging an exposure to interest rate risk or otherwise.

Foreign Institutional Investors, registered with Securities and Exchange Board of India (Sebi), are permitted to purchase or sell IRF subject to the condition that the total gross long (bought) position in the spot Government securities market and IRF markets taken together does not exceed the aggregate permissible limit for investment in Government securities and the total gross short (sold) position of each Foreign Institutional Investor in IRF, does not exceed their long position in the Government securities and in IRF at any point in time.

However, no scheduled bank or such other agency falling under the regulatory purview of the Reserve Bank shall participate in the IRF market until such participation has been permitted by the central bank. Also the regulated entities or agencies under the regulatory purview of any other regulator established by law shall not participate in IRF market except with the permission of their respective regulators.

The 10-year IRF contract shall be on coupon bearing notional 10-year Government of India security. The coupon for the notional 10-year Government of India security shall be 7% per annum with semi-annual compounding. The contract shall be settled by physical delivery of deliverable grade securities using the electronic book entry system of the existing Depositories, namely, National Securities Depositories Ltd. and Central Depository Services (India) Ltd. and Public Debt Office of the Reserve Bank. Deliverable grade securities shall comprise Government of India securities maturing at least 7.5 years but not more than 15 years from the first day of the delivery month with a minimum total outstanding stock of 10,000 crore. Exchanges may select their own basket of securities for delivery from the deliverable grade securities in accordance with guidelines issued by the Sebi from time to time.

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