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The Metropolitan Stock Exchange of India (MSEI) has become the first exchange to receive SEBI approval for launching weekly contracts on interest rate futures (IRFs) besides introducing weekly futures and options in cross currency pairs of EUR-USD, GBP-USD, USD-JPY.
It has also received permission to introduce weekly futures contracts on currency pairs such as USD-INR, EUR-INR, GBP-INR, JPY-INR and weekly options on EUR-INR, GBP-INR, JPY-INR.
The exchange plans to give one-month notice to trading members, clearing corporations and other exchanges on Tuesday and start trading on these contracts soon.
In a letter to the exchange, SEBI said based on the submissions made by the MSEI, its request to introduce weekly contracts on interest rate futures has been accepted.
Ajit Singh, Vice-President and Head — Business Development, MSEI, said with the weekly currency contracts, the Indian fixed income market now has the ability to hedge market-risk exposure from short-term policy moves such as the RBI policy rate decisions without taking month-long futures positions, which may have other dynamics at play.
The IRFs would now have weekly convergences with interest rates, and hence, short-term speculative spread trading on interest rate futures, especially during periods of rate volatility. It should logically create a new, potentially highly profitable avenue of income for market participants, he added.
Risk of cannibalisation
Asked whether the weekly IRF will cannibalise monthly contracts, Singh said both will complement each other, with the weekly IRFs creating more avenues for hedging and speculation than monthly IRFs, while providing intermediate tenor continuity within the month, thereby enhancing the effectiveness of the monthly IRF market.
The weekly cross currency options contracts offer market participants the ability to hedge against specific policy changes not only by the US Fed and the RBI but also the European Central Bank and other regional central banks without having to take unnecessary and expensive monthly positions.
Besides policy measures, sudden change in liquidity and volatility across multiple currency markets can now become a source of profit for Indian market participants through the weekly cross currency contracts.
After the introduction of inter-operability among clearing corporations, the MSEI has seen good traction among institutional and high networth investors on bulk deals in equity since no trades are executed through algo on the platform.
When large institutional investors are executing bulk deals on other exchanges, there are chances that a portion of the stock is bought over by other investors due to the extensive use of high-speed algo trades, said a trader.
The average monthly turnover of the exchange has increased 88 per cent to ₹12,518 crore in December from ₹6,658 crore logged in September when the benefit of clearing corporations’ inter-operability started kicking in.
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