Interest rate futures to see regulatory changes

In a bid to give a boost to the interest rate futures market,which has failed to take off despite a number of measures taken by the Reserve Bank of India

In a bid to give a boost to the interest rate futures (IRF) market,which has failed to take off despite a number of measures taken by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) over the past three years,financial regulators plan to introduce some changes in the product features and delivery process.

In contrast to the currency futures market,the IRF segment has not taken off at all. We are examining this in consultation with the Sebi and will be introducing some changes in the product features and delivery process, a senior RBI official said.

The central bank may introduce more of cash-settled futures,and derivatives with varying maturities,the official said.

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The RBI in March introduced a short tenure futures contract on 91-day treasury bills in order to improve liquidity in the market; but the market is still witnessing meagre volumes. Market players feel IRFs have not developed as a good hedge for the deliverable security.

It has got to do with the way delivery system is designed. Consolidation of papers available for delivery and improving the liquidity will help in developing the market, said GV Nageswara Rao,managing director & chief executive officer of IDBI Federal Life Insurance. Interest rate futures is a derivative with an interest-bearing instrument such as government securities and treasury bills as the underlying asset. This product is typically meant for financial institutions such as insurance companies,banks,provident funds and primary dealers,who carry almost 88 per cent interest rate risk in the financial system.

These institutions can take a view on the interest rate movement and hedge their currency risk.