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The National Stock Exchange (NSE) will Monday launch trading in interest rate futures (IRF) on 91-day T-Bills.
Although the earlier exchange-traded IRF contracts had seen muted market response, there is palpable excitement around the launch of IRF on 91-day T-Bills as it has some unique features.
The new product will bring benefits to the markets as a whole. Moreover, it is being launched at a time when interest rates are volatile and there is need for credible institutional hedging mechanism, a NSE official pointed out.
For hedging
It will help banks, mutual funds and corporates to hedge their exposure to interest rates and cover the short-term interest rate risk.
Foreign institutional investors (FIIs) too can participate, but for hedging purposes.
As for benefits, firstly, the IRFs will be cash-settled and not physically settled as was the case in the earlier futures contracts.
As a result, investors can trade without the worry of being saddled with illiquid contracts, which could have been the case if contracts were physically settled.
Lower cost
Secondly, the cost of trading is expected to be lower than trading in equity derivatives or equities as there will be no securities transaction tax (STT).
IRFs on 91-day T-Bills will be traded in the currency segment of the exchange. There will be no requirement of conforming to any new formalities, of a new account or of doing the ‘know your customer' (KYC) again.
Shorter end
The Reserve Bank of Indiai's also considering introduction of IRF contracts on 2-year and 5-year G-secs. This would provide products at the shorter end which would offer flexible hedging options to the market participants.
NSE had in August 2009 launched IRF contracts on 10-year notional coupon bonds. This product witnessed significant activity during the initial period, but liquidity tapered off subsequently.
The muted response was attributed to the illiquid nature of the underlying G-sec market and lack of hedging interest in the wake of present held-to-maturity regime.
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