Wednesday September 2, 12:30 PM

India kicks off interest rates futures trading

By Neha D'Silva and Saikat Chatterjee

MUMBAI (Reuters) - India kicked off trading in interest rates futures on Monday, the latest in a series of steps to deepen the country's markets, giving participants such as banks and companies a way to hedge against rate risks.

Trading on the National Stock Exchange (^NSEI : 4941.75 -63.8) began six years after an earlier edition failed due to faulty benchmarks and comes a year after regulators allowed currency futures trading.

More than 12,000 March and December contracts, worth about $4.9 million, were traded in the first three hours on the National Stock Exchange, the country's largest bourse. Open interest stood at 2,178.

At 3:29 p.m. (0959 GMT), the December contract was at 91.88 rupees after opening at 94.50. The March futures eased to 90.9875 rupees from 91.11 at the start.

The contracts, each of 200,000 rupees ($4,090), are based on 10-year government bonds bearing a notional coupon of 7 percent per annum, compounded every six months.

"The launch of interest rate derivatives means a lot to the NSE, its constituency of brokers and all economic entities who face interest rate risk," NSE Managing Director Ravi Narain said.

Futures contracts are exchange traded with an agreement to buy or sell an underlying instrument at a certain date in the future at a specified price.

The contracts would be settled in March, June, September and December. The maximum maturity will be 12 months. Deliverable securities under the futures should mature between 7-½ years and 15 years with minimum outstanding of 100 billion rupees.

The central bank has laid down detailed guidelines for trading in the rates futures. Commercial banks are allowed to take trading positions for themselves but can not trade on behalf of their clients.

"The futures market has got a reasonably positive response. Volume is fairly healthy for the first day and as and when people get permission to trade in this market, volumes should increase," said Vineet Malik, head of interest rates trading at HSBC India.

Regulators are also planning to introduce repurchase deals, or repos, in corporate bonds, a move that would enable hedging in that market.

DEVELOPING MARKETS

Until now investors could hedge their interest rate risk on their portfolios only via the over-the-counter overnight indexed swaps market. Anshuman Jaswal, an analyst at Celent, said the interest rate futures would add depth to the market.

"The greater uncertainty in the global economy and the higher movement in interest rate levels in India also mean that this product is being re-introduced at the right time," he said.

Apart from banks, non-resident Indians, companies, primary dealers and foreigners can trade in this segment. Foreign investors can trade to the extent they possess the underlying security, but not for speculative purposes.

In comparison, volumes were a normal 37.55 billion rupees in the underlying government bond market, according to the central bank's electronic trading platform.

Other exchanges are scrambling to offer similar products.

Rival Bombay Stock Exchange (^BSESN : 16632.01 -222.92) said last week it had received regulatory approval for interest rates futures and would launch in 8-10 weeks.

U. Venkataraman, executive director of the Multi Commodity Exchange's foreign exchange derivatives bourse, said it was awaiting regulatory approval to launch interest rate futures trading.

"I think it gives us optimism that this time the product should succeed," Reserve Bank of India deputy governor Shyamala Gopinath said.

(Additional reporting by Swati Bhat)