NSE launches trading in interest rate futures

Trading in interest rate futures began on the National Stock Exchange (NSE) on Aug. 31. The contracts are based on 10-year government bonds bearing a notional coupon of 7% per annum, compounded every six months. Banks and companies can hedge against interest rate risks using interest rate futures. "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. The contracts would be settled in March, June, September and December. The maximum maturity will be 12 months.

Interest rate futures clocked trading volumes of Rs2.76bn in their very first day of trade. Trade in the newly-launched derivatives is expected to pick up with regulators and government officials stating that the exchange-traded instruments are superior to over-the-counter overnight index swaps. Close to 15,000 contracts of the two bond futures were traded on Aug. 31 - based on the 10-year notional bond maturing in December 2009 and March 2010.

The Reserve Bank of India (RBI) has laid down detailed guidelines for trading in the interest rate futures. Commercial banks are allowed to take trading positions for themselves but can not trade on behalf of their clients. The Bombay Stock Exchange (BSE) has received regulatory approval for interest rates futures while the Multi Commodity Exchange's foreign exchange derivatives bourse has also sought permission to launch trade in interest rate futures.

Interest-rate futures are the first major product to be introduced in India after the launch of currency futures in August 2008. Currency futures have steadily picked up, with the combined daily turnover across exchanges totaling more than US$2bn.