SEBI to begin interest rate futures by '09

The Securities and Exchange Board of India (SEBI) after successfully launching the currency trade in derivatives is now mulling over to introduce a new product Exchange Trade Funds (ETFs) based on Interest Rate Future (IRF) – typical futures contracts where the holder agrees to take delivery of a given amount of the related debt security at a later date – on the first quarter of 2009, informed SEBI’s whole time member TC Nair in ASSOCAHM meeting on Tuesday in New Delhi.

Addressing to the members of ASSOCHAM, Nair said, “Exchange traded interest rate futures will be permitted by December-January, latest by January.” Adding further he said that it would stabilise the fluctuation and volatility in interest rates and helps banks, financial institutions and FIIs to hedge the situation from upside fluctuation and downside risk.

Speaking on the same topic in a separate meeting of Merchants’ Chamber of Commerce in Kolkata, SEBI Chairman CB Bhave said a joint committee with the Reserve Bank of India (RBI) has been appointed to study the technical aspects of trading.

‘This SEBI-RBI team is the same team that had studied the technical aspects of Currency Futures and this time the past experience of Currency trading in Future would work and in launching the new product, it would take lesser time,’ added Bhave.

The Futures may be in treasury bills and notes, certificates of deposit, commercial paper, or any other interest-bearing certificates. ‘The technical committee had recommended to introduce other government securities for interest rate future that would be initially based on 10-year government bond yield and would be settled by physically delivery,’ as Bhave cited.

SEBI is also considering to allow Foreign Institutional Investors (FIIs) to invest directly in currency futures through P-notes – the derivative instrument with shares or derivatives that is issued by the FIIs to their overseas clients who can not directly invest in India- as FII used the p-notes in trading of other derivative product. SEBI had imposed restriction on P-notes last October to operate capital inflows and enhance transparency in derivative market.

‘Over 400 FIIs have registered with SEBI in the past ten months, some have got clearance and some are still under process whose application would be cleared shortly,’ told Nair.