MCX-SX hopeful of launching futures trading on interest rates

KOLKATA: MCX-SX is hopeful of launching futures trading on interest rates on its platform by the month-end with the joint committee on interest rate futures expecting to finalise operational guidelines shortly.

The joint committee, drawing representatives from Reserve Bank of India, Securities & Exchange Board of India (Sebi) and three national commodity exchanges, is holding parleys to finalise the nitty gritty of the operation of interest rate futures on the basis of the report submitted by the technical advisory committee, formed by the Centre to create a framework for trading on this derivative instrument.

This was indicated by MCX-SX executive director U Venkataraman while conducting an awareness programme on interest rate futures here on Saturday.

Though there is consensus on the broad parameters of the trading, issues like delivery schedule, settlement mechanism and optimum number of tradable securities are now being discussed at the joint committee level. To bring about an efficient settlement mechanism, options are being weighed on how to bring about a seamless interlinkage among the existing depositories - National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) - and public debt offices of the RBI for physical delivery of deliverable grade securities, he said
Once that trading is launched, it would enable interested parties to hedge their position against interest rate fluctuations in government securities and corporate bonds on short and long term basis, besides offering scope for doing arbitrage on the derivative product.

With the Centre planning to borrow heavily from the domestic market in order to bridge the fiscal gap, more and more government securities are expected to be floated in the coming years. This is expected to spur liquidity in the domestic debt market and thus volume trading in interest rate futures, said Mr Venkataraman.

Total turnover in GoI dated securities increased from Rs. 1,770,980 crore in 2006-07 to Rs. 2,957,070 crore in 2007-08, yet the trading volume in the debt market remains low in comparison to the developed markets. Banks, insurance companies, primary dealers and provident funds bear a major portion of the interest rate risk on account of their exposure to government securities. With a large stock of household financial savings on the assets side and an increasing quantum of housing loans on the liabilities side, interest rate risk is becoming increasingly important for the household sector as well.

So far, 18 government securities with a maturity period of 71/2 to 15 years have been identified to be tradable on the basis of the delivery-based futures contracts. The technical advisory committee in its report has recommend to consider 10-year government security as the reference rate, with a notional coupon rate of 7%.

Anticipating an imminent launch, MCX-SX has started conducting road shows and workshops to spread awareness about trading in interest rate futures among market participants. About a week back, it has launched mock trading on this derivative product on its platform and is ready with the necessary software and technology for this trading. From next week, it will start training programmes, targeting specific interest groups.