RBI panel suggests interest rate futures :UTVi

RBI panel suggests interest rate futures

To enable banks, FIIs and other players manage interest rate risks, an RBI-appointed technical panel today recommended introduction of futures contracts, initially based on 10-years government bond yield, which should be settled by physical delivery.

RBI's Technical Advisory Committee suggested that as market evolves, exchanges may consider introducing contracts on various other government securities.The group also recommended that these products be exempted from securities transactions tax to ensure symmetry between cash market in government and other securities and interest rate futures.

These proposals are put on RBI's website and the central bank would view feedback on these suggestions from the public before coming out with finale guidelines on IRF.
The RBI had recently issued guidelines on currency futures, which is to be put in place by the month end.
The need for interest rate futures arose because of failure of exchange traded interest rate futures contracts introduced by NSE in 2003.
Earlier, in 1999, the RBI also took initiative to introduce over-the-counter interest rate futures. Taking lessons from experiences of these products, the RBI panel recommended that futures contract initially be based on the 10-year government security yield.
It observed that banks, insurance companies, primary dealer and provident funds who among them carry almost 88% of interest rate risk on account of exposure to government securities need a credible institutional hedging mechanism.

The group also recommended that banks be allowed to be able to trade in interest rate futures against the current practices of permitting them only to hedge their interest rate risks inherent in the balance sheet.

The group also recommended participation by FIIs and NRIs in the interest rate futures. However, FIIs may be allowed to take long position in the IRF market, which should not exceed maximum permissible cash market limit, currently pegged at $4.7 billion.

FIIs may also be allowed to take short positions in the market but only to hedge actual exposure in the cash market.

On the accounting treatment of IRF, the committee has suggested that till accounting standard prescribed by the institute of chartered accountants becomes mandatory, which is to be done by 2011, RBI should excercise its powers and mandate uniform accounting treatment for Interest rate swaps and interest rate futures.
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Source:UTVi