Second chance for interest rate futures

The end of August saw the long-awaited re-launch of exchange-traded interest rate futures (IRFs), as part of ongoing financial sector reforms. This is the first major initiative in the derivatives market since the launch of currency futures around the same time last year. The introduction of IRFs is a positive effort to add further depth to India’s financial markets; if successful, it will offer a liquid product to meet the hedging and arbitrage needs of market participants.

IRFs were first launched unsuccessfully six years ago. Their failure to find a market at that time was attributed to the restriction on participation by banks, which are the most significant holders of government debt, and to IRFs being linked to the zero yield curve, a benchmark that was then not well developed in India.

The new IRF regime is the latest attempt to introduce greater transparency, standardization and efficiency to the debt market. Learning from past experience, the Securities and Exchange Board of India and the Reserve Bank of India (RBI) established a technical committee to advise on how the product should be redesigned.

Ameya Khandge is a partner at Trilegal in Mumbai where Vardaan Ahluwalia is an associate. Trilegal is a full service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some with experience at law firms in the US, the UK and Japan.