Sebi and RBI in talks on giving a boost to interest rate futures

With RBI we are re-looking at IRF which is currently seeing less traction, says Sebi chairman Ajay Tyagi

Jayshree P. Upadhyay, Alekh Archana
Updated16 Dec 2017
Sebi chairman Ajay Tyagi. Photo: Abhijit Bhatlekar/Mint
Sebi chairman Ajay Tyagi. Photo: Abhijit Bhatlekar/Mint

Mumbai: The Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) are in consultations to give a boost to interest rate futures (IRF) which is currently struggling under low volumes, Sebi chairman Ajay Tyagi said on Thursday.

“With RBI we are re-looking at IRF which is currently seeing less traction,” Tyagi said at the NSE-NYU conference on Indian Financial Markets in Mumbai.

An interest rate future is a financial derivative with an interest bearing instrument such government bonds as the underlying asset. It is used to hedge risks related to interest rate volatility.

IRF was relaunched for a third time during its lifetime in January 2014 by exchanges. Even in the third attempt, it has struggled to garner volumes due to limited participation. The average daily volume of IRFs on both NSE and BSE stands at Rs1,800 crore, according to Sebi data. On NSE, the average daily turnover for IRF from April to date is Rs1,318 crore.

Insurance companies, non-banking financial companies and housing finance companies cannot use the instrument for their hedging requirements.

“NBFCs participating as clients are not allowed to take any trading position. They are only allowed to use IRF for hedging asset and liabilities. Housing finance companies have not been permitted to hedge their interest rate exposure using IRFs,” said Tyagi.

Currently, IRF usage is restricted to foreign banks and a few private sector banks. Public sector banks have lately stayed away from this segment.

“In the past few years, since we were mostly into a secular interest rate down-cycle, there was no need for banks to buy futures as there were no contrary views on rates. Additionally, in the view of lower credit growth, banks preferred investing in government securities rather than IRFs. Now that we are at the bottom of the easing rate cycle, there will be contradictory calls on interest rates, depending on each participant’s view on inflation and other headwinds. So volume can possibly go up,” said Soumyajit Niyogi, associate director at India Ratings.

On the sidelines of the event, Tyagi also said that Sebi is working on a formula for default disclosures in consultation with credit rating agencies and banks. The formula will determine how a default is defined for the purpose of disclosures.

In August, Sebi had mandated that listed companies disclose all loan defaults within a day. It withdrew the directive on 30 September, just a day before it was to take effect.

The circular was withdrawn following feedback from banks that a default definition needs to be crystallized.

On the leakage of earnings and key company information on WhatsApp and other social media, Tyagi said out of the 12 companies under examination, in seven, the information leaked on social media was very similar to the actual earnings.

“We have sought information from compliance officers of these companies,” said Tyagi.

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