Trading in interest rate futures permitted

In a circular dated 28 August, SEBI introduced trading in exchange-traded interest rate futures (IRFs), which are standardized derivative contracts. IRFs differ from other derivative products only in the underlying security, which is a 10-year government security (G-Sec) rather than a stock.

SEBI has specified the following characteristics of IRFs, to be complied with by stock exchanges:

• a prescribed list of deliverable grade securities (DGSs) from which exchanges may select a basket of securities to underlie the IRFs;
• a maturity period for the DGSs of seven and a half to 15 years, calculated from the first day of the delivery month, with a minimum total outstanding stock of Rs100,000 million (US$2 billion);
• a contract size of Rs200,000 with a maximum maturity period of 12 months;
• a contract cycle of four fixed quarterly contracts (expiring in March, June, September and December);
• contracts to be settled by physical delivery of DGSs using the electronic book entry system of the existing depositories and the public debt office of the Reserve Bank of India;
• an interest rate of 7% for G-Secs; and
• a daily settlement price based on the last half hour weighted average price of the futures contract.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.