FAQs
FAQs Interest Rate Derivatives

1.What is Government of India Security?

The Government Securities comprise of dated securities issued by the Government of India and State Governments. These instruments play a vital role in the Indian economy as it provides a benchmark for determining the level of interest rates in the country through yields on Government Securities which are referred to as the risk-free rate of return.


2.How to Trade in Underlying GoI Securities Market?
Presently the instruments can be traded vide:

  • NDS-OM, a screen based electronic anonymous order matching system for secondary market trading in Government Securities owned by RBI. Presently the membership of the system is open to entities like Banks, Primary Dealers, Insurance Companies, Mutual Funds etc. i.e entities who maintain SGL accounts with RBI. These are Primary Members (PM) of NDS and are permitted by RBI to become members of NDS-OM. Gilt Account Holders which have gilt account with the PMs are permitted to have indirect access to the NDS-OM system i.e they can request their Primary Members to place orders on their behalf on the NDS-OM system.
  • Retail Trading in Government Securities is also enabled on Exchange platform BOLT where trades can be entered through Trading Members of the Exchange.


3.What is an Interest Rate Future and what are the enabling guidelines for the same?

An Interest Rate Future is a derivatives contract with an interest- bearing instrument as the underlying asset.
The Regulators Securities Exchange Board of India and Reserve Bank of India vide notifications CIR/MRD/DRMNP/35/2013 and IDMD.PCD. 08/14.03.01/2013-14 dated December 5, 2013 have introduced cash settled Interest Rate Futures (IRF) on 10-year Government of India security. The links to the guidelines can be accessed on:

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1386240774413.pdf
http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8621&Mode=0

Exchange guidelines for the same:

BSE Circular:
https://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20140111-1

ICCL Circular :
https://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20140113-1


4. Who are permitted to trade in Interest Rate Futures?

All the trading members of the Currency Derivatives Segment will be eligible to trade in the Interest Rate Futures contracts enabled on the Exchange. The same is subject to the entities being termed as “Eligible entities” under the guidelines issued by Reserve Bank of India on December 5, 2013.
Reserve Bank of India has, vide IDMD.PCD.09 /14.03.01/2013-14 dated December 19, 2013, issued guidelines for Banks participation in Exchange Traded Interest Rate Futures. Through these guidelines banks are permitted to participate in IRF both for the purpose of hedging the risk in the underlying investmentportfolio and also to take trading position. Also stand- alone Primary Dealers are allowed to deal in IRF for both hedging and trading on own account and not on clients account

Formalities for seeking membership in the Currency Derivatives segment on BSE can be accessed on the following link:
https://www.bseindia.com/members/currency_derivatives_member.aspx?



5.What are the benefits of trading in Interest Rate Futures?

The main benefits of the 10 Year Interest Rate Futures contracts being introduced are:

  • Unlike the OTC Trading of Interest Rate Derivatives Exchange traded IRF will provide wider reach, transparency and zero counterparty risk
  • The current product design of IRF can be very liquid mainly due to the product being homogeneous
  • Interest rate management tool for all entities which have exposure to government securities
  • Efficient Asset Liability Management tool for banks and financial institutions
  • Banks, Primary Dealers, Mutual funds and Insurance companies can use futures for arbitrage or hedging purposes

Few instances of how this product can be used:

  • Yield on the benchmark 10 year Central Government securities declined from 8.63% in April 2012 to 7.99% by 31st March 2013. Existence of an IRF product on in this scenario would have offered entities with exposure to government securities, opportunities for hedging and churning the SLR portfolio.
  • Mutual Funds can protect and optimize the Net Asset Value by hedging against the interest rate volatility.
  • Insurance companies, in general, are subject to interest rate risk, given their investments in fixed-income assets. For instance in a rapidly increasing interest rate scenario life insurance participants might opt to “cash out” their existing policy and reinvest the proceeds in a new, higher-yielding product, hence if a hedging mechanism is available the Insurance Companies can protect their portfolio from such risks.
  • Every Corporate house is subject to interest rate risk, the same can be mitigated by using Exchange traded IRF products. For instance a Corporate enters in an IRF Contract and with the same purchase the current interest rate level can be hedged for a future loan: If interest rates rise by the time the loan is taken out, a profit is made on the IRF Contract.


6.What is the underlying security for the Futures Contract?

The Exchange has introduced vide notification 20140111-1 dated January 11, 2014, Interest Rate Future (IRF) contracts on two instruments.

The criteria for selection of Government Security for the purpose of introduction of futures contract is:

• The securities which are identified as liquid security based on market participants’ feedback or benchmark security/nodal point as per FIMMDA and it fulfils following further criteria.

  • The security has residual maturity between 9 to 10 years on the day of expiry of IRF contract.
  • The outstanding issue size of the security including re-issuances as may be decided by the Exchange from time to time.
  • The security shall have a face value of Rs 100 and pay coupons semi-annually for it to be eligible for introduction of IRF


7.Which are the single security future products currently available for trading?

The Exchange has currently enabled

  • 7.16% GOI maturing on 20th May 2023 (ISIN: IN0020130012)
  • 8.83% GOI maturing on 25th November 2023 (ISIN : IN0020130061)
  • Calendar spread facility shall be available for trading across 3 contract months at any time, corresponding to the current, near and far monthly futures instruments on both the above instruments. Based on new securities being issued or existing securities fulfilling criteria as stated in 6 above , the Exchange may in future introduce single security futures on additional securities.


8.What is the security descriptor of the single security future?

The 10 year IRF will be described using the nomenclature of the coupon rate, underlying instrument residual maturity and year of maturity.

Eg : A 8.83% Government of India Security maturing in 2023 shall be given the following descriptor: + <2 Digit Contract Expiry Year> + <3 Char Contract Expiry Month> +<”FUT”> eg. “10YGS88314JANFUT”

Eg of 10YGS883 spread contracts :- Considering that January is the Current Month, Feb being the near and March being the far month, following spread contracts will be available for trading:-

10YGS883JANMAR14 :- Current Month -Far Month
10YGS883JANFEB14 :- Current Month -Near Month
10YGS883FEBMAR14 :- Near Month -Far Month


9.What is the frequency of change in underlying security of the 10 years IRF?

The Exchange will review on a regular basis the introduction of contracts on new securities. On basis of review of the security the Exchange shall announce change in underlying in consultation with FIMMDA.
The market shall be given a considerable prior intimation in case where the underlying instrument is being revised by the Exchange.When the underlying is changed, existing contracts of the older underlying will continue to be available till of expiry of such contracts.


10.What is the Quote Price and Contract Size in 10 Year IRF’s?

The quotation would be similar to the quoted price of the GOI security. The day count convention for interest payments would be on the basis of a 360-day year, consisting of 12 months of 30 days each and half yearly coupon payment.

Contract size: 2000; Contract Value: Rs. 2,00,000


11.Where can one view trades in this instrument on the bseindia website?

The transactions in all the contracts introduced can be viewed on a real time basis on the BSE LTD. website on the following link:https://www.bseindia.com/markets/currencyDerivatives/IRDWatch.aspx?expandable=1


12.What are the trading Hours in IRF’s?

9.00 a.m. to 5 p.m. Trade modification and give up timing is 9.00 am to 5.30 pm


13.What are the Contract Tenures permitted by SEBI in 10 Year IRF?

Three serial monthly contracts shall available for trading.


14.What is the Expiry / Last Trading Day of the contract?

The expiry / last trading day for the contract shall be the last Thursday of the expiry month. If any expiry day is a trading holiday, then the expiry/ last trading day shall be previous trading day. In case shut period of the underlying security falls on the expiry day, then the expiry/last trading day shall be previous trading day.On the date of expiry trading is permitted till 5.00 pm.


15.What is the Final Settlement Day / Procedure on Expiry of the 10 Year IRF’s?

Settlement day shall be the next working day of the Expiry day. The Final Contract Settlement Value shall be = 2000 * Pf where Pf is the final settlement price of the Underlying/Notional security, which shall be determined as given below. Pf will be arrived at by calculating the weighted average price of the underlying security based on the prices during the last two hours of the trading on NDS-OM. If less than 5 trades are executed in the underlying security during the last two hours of trading, then FIMMDA price shall be used for final settlement.


16.What are the applicable provision limits?

Following position limits shall be applicable for IRF contracts:

a) Client Level The gross open positions of the client across all contracts shall not exceed 3% of the total open interest or INR 200 crores, whichever is higher
.
b) Trading Member Level: The gross open positions of the trading member across all contracts shall not exceed 10% of the total open interest or INR 600 crores, whichever is higher.

c) Clearing Member Level: No separate position limit is prescribed at the level of clearing member. However, the clearing member shall ensure that his own trading position and the positions of each trading member clearing through him is within the limits specified above.

d) FIIs: The gross open positions of the FII across all contracts shall not exceed 10% of the total open interest or INR 600 crores, whichever is higher.

Additional restriction: The total gross short (sold) position of each FII in IRF shall not exceed its long position in the Government Securities and in Interest Rate Futures, at any point in time. The total gross long (bought) position in cash and IRF markets taken together for all FIIs shall not exceed the aggregate permissible limit for investment in Government Securities for FIIs. FIIs shall ensure compliance with the above limits. Stringent action shall be taken against FII in case of violation of the limits.
e) Exchange Level Overall Position Limit: INR 25,000 crore or 25% of the outstanding of underlying security whichever is higher.


17.What are the applicable price bands?

For every IRF contract, initial price band at 3% of the previous closing price thus preventing acceptance of orders for execution that are placed beyond the set band.Whenever a trade in any contract is executed at the highest/lowest price of the band, the Exchange may expand the price band for that contract by 0.5% in that direction after 30 minutes after taking into account market trend. However, maximum of 2 such expansions in the price band shall be allowed within a day.

Further, SEBI in consultation with RBI may halt the trading in case of extreme volatility in the IRF market.


18.Which are the registered Trading Members through whom this product can be traded?

Interest Rate Derivative Contracts have been enabled on the Currency Derivatives Segment of the Exchange. List of Members can be viewed on https://www.bseindia.com/members/MembershipDirectory.aspx?expandable=2


19.What is the settlement mechanism of Interest Rate Futures?

The 10 year GOI Interest Rate Futures would be settled in cash in Indian Rupees.
Indian Clearing Corporation Limited (ICCL) shall be conducting the clearing and settlement activities for Interest Rate Futures contracts.



20.What are the Margin Requirement for trading in 10 Year IRF?

The Initial Margin requirement based on a worst case loss of a portfolio of an individual client across various scenarios of price changes shall be applied, further Extreme Loss margins and calendar spread margins shall also be applied, and margins shall be deducted from the liquid assets of the clearing member on an on line, real time basis. Detailed guidelines on risk management can be accessed through Indian Clearing Corporation Limited circular 20140113-1 issued on January 13,2014.



21.What is the mechanism of calculation of Daily Settlement Price?

In the absence of last half an hour trading the Exchange will calculate the daily settlement price based on the following theoretical formulae:
For computing theoretical future price, the Exchange shall first take "spot" price from:-

i. Weighted average price of the underlying security in last two hours of trading on NDS-OM

ii. If no trades are executed in the underlying security in the last 2 hours of trade on NDS OM , then a theoretical price with reference to FIMMDA rates shall be used. FIMMDA publishes prices of every security daily end of day. This price shall be spot price.

Theoretical security futures price (“F”) = Spot price (“S”) + Financing Cost (based on Dirty Price (“DP”)) (“R”) - Income received (“C”)

R = DP * r * t

DP = S + accrued interest on the underlying security from last coupon day to the settlement day

r = Rate of interest [Cost of carry]

t = Term (in years) from settlement day to the day of settlement of expiry

Income Received = Accrued Interest on the security till settlement day of expiry - Accrued Interest on the security on settlement day plus income received from reinvestment of coupon payment if any based on r (cost of carry) from coupon payment day to the expiry day.

r, the rate of interest to be considered is the OIS rates for 1-month, 2-month and 3-month.
To arrive at the rate exactly for the time period, the selected rate would be further interpolated or extrapolated to get rate near to the time period.



22.What are the various files which can be downloaded by a participant from the system?

Details regarding the same are available in the master circular on Interest Rate Derivatives issued by the Exchange, link to the same is as follows

Master Circular for Trading in BSE Interest Rate Derivatives Contracts

Further the daily settlement price can be accessed by the member on the following link on the bseindia
website :

https://www.bseindia.com/markets/currencyDerivatives/Ird_Settlement.aspx?expandable=1