SUBJECT : INTRODUCTION OF EXCHANGE-TRADED INTEREST

RATE DERIVATIVES IN INDIA

ISSUED BY : SECONDARY MARKETS DEPARTMENT

The RBI, in November 2002, constituted a Working Group on OTC Rupee Derivatives, which recommended the introduction of exchange-traded interest rate derivatives. The SEBI Secondary Market Risk Management Group considered the recommendations of the RBI Working Group and submitted their recommendations on interest rate derivative products to be initially introduced on the exchanges and the risk containment measures thereof. The Report of the SEBI Secondary Market Risk Management Group was placed on the SEBI website.

Now, in consultation with the Government of India and the Reserve Bank of India, SEBI Board has approved the introduction of exchange-traded interest rate derivative products. To begin with, futures contracts on a Notional Government Security with a 10 year maturity and a Notional Treasury Bill with a maturity of 91 days or three months shall be introduced, and options contracts shall be introduced later. The Interest Rate Derivative Contracts shall be traded on the derivative exchange / segment of BSE and NSE and would be settled through the Clearing house/ corporation of the Exchanges.

The Interest Rate Derivatives Contracts shall comply with the disclosure and other requirements as specified by SEBI from time to time. The Exchange may introduce futures contract on the notional bonds up to a maturity of one year. The notional underlying could be a zero coupon bond. The Long Bond Futures and Notional T- Bill Futures shall initially be cash settled. The minimum contract size of an Interest Rate Derivative Contract shall not be less than Rs. 2, 00,000/- at the time of its launch. The Exchanges shall, however, obtain prior approval of SEBI for the introduction of trading of the contracts on the exchange.

The final settlement price of the Long Bond Future and the Notional T-Bill Future shall be determined using a ‘zero coupon yield curve’. The ‘zero coupon yield curve’ shall be computed from the prices of Government Securities traded on the Exchange/s or reported on the Negotiated Dealing System of RBI, or both. The ‘zero coupon yield curve’ may be computed by the Exchange or by any other yield curve provider designated by the Exchange, which shall conform with the disclosure standards prescribed by the SEBI Secondary Market Risk Management Group.

The present portfolio based margining approach applicable to equity derivative contracts shall also apply to Interest Rate Derivative Contracts. The detailed risk containment measures for the interest rate derivatives have been prescribed by the SEBI Secondary Market Risk management Group. The positions limits are specified at the client level, which is Rs. 100 Cr or 15% of Open Interest whichever is higher.

Necessary circulars in this regard have been issued to the stock exchanges. The tentative date for the commencement of trading in interest rate derivative contracts on the exchanges has been set as 28^th April, 2003.



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Press Release PR No.:92/2003 April 19, 2003 SUBJECT SUBJECT : INTRODUCTION OF EXCHANGE-TRADED INTEREST RATE DERIVATIVES IN INDIA ISSUED BY : SECONDARY MARKETS DEPARTMENT The RBI, in November 2002, constituted a Working Group on OTC Rupee Derivatives, which recommended the introduction of exchange-traded interest rate derivatives. The SEBI Secondary Market Risk Management Group considered the recommendations of the RBI Working Group and submitted their recommendations on interest rate derivative products to be initially introduced on the exchanges and the risk containment measures thereof. The Report of the SEBI Secondary Market Risk Management Group was placed on the SEBI website. Now, in consultation with the Government of India and the Reserve Bank of India, SEBI Board has approved the introduction of exchange-traded interest rate derivative products. To begin with, futures contracts on a Notional Government Security with a 10 year maturity and a Notional Treasury Bill with a maturity of 91 days or three months shall be introduced, and options contracts shall be introduced later. The Interest Rate Derivative Contracts shall be traded on the derivative exchange / segment of BSE and NSE and would be settled through the Clearing house/ corporation of the Exchanges. The Interest Rate Derivatives Contracts shall comply with the disclosure and other requirements as specified by SEBI from time to time. The Exchange may introduce futures contract on the notional bonds up to a maturity of one year. The notional underlying could be a zero coupon bond. The Long Bond Futures and Notional T- Bill Futures shall initially be cash settled. The minimum contract size of an Interest Rate Derivative Contract shall not be less than Rs. 2, 00,000/- at the time of its launch. The Exchanges shall, however, obtain prior approval of SEBI for the introduction of trading of the contracts on the exchange. The final settlement price of the Long Bond Future and the Notional T-Bill Future shall be determined using a ‘zero coupon yield curve’. The ‘zero coupon yield curve’ shall be computed from the prices of Government Securities traded on the Exchange/s or reported on the Negotiated Dealing System of RBI, or both. The ‘zero coupon yield curve’ may be computed by the Exchange or by any other yield curve provider designated by the Exchange, which shall conform with the disclosure standards prescribed by the SEBI Secondary Market Risk Management Group. The present portfolio based margining approach applicable to equity derivative contracts shall also apply to Interest Rate Derivative Contracts. The detailed risk containment measures for the interest rate derivatives have been prescribed by the SEBI Secondary Market Risk management Group. The positions limits are specified at the client level, which is Rs. 100 Cr or 15% of Open Interest whichever is higher. Necessary circulars in this regard have been issued to the stock exchanges. The tentative date for the commencement of trading in interest rate derivative contracts on the exchanges has been set as 28^th April, 2003.