Securities and Exchange Board of India on Tuesday said it will allow trading in exchange traded interest rate futures by December-January, a move which will help banks and FIIs manage interest rate risks.
"Exchange traded interest rate futures will be permitted by December-January, latest by January," Sebi Whole-Time member T C Nair told reporters.
Initially, these futures contracts would be based on 10-year government bond yield, which should be settled by physical delivery.
Recently, an RBI-appointed technical panel recommended introduction of futures contracts, suggesting that as market evolves, exchanges may consider introducing contracts on various other government securities and had sought public comments.
The group had also recommended that these products be exempted
from securities transactions tax to ensure symmetry between cash market in government and other securities and interest rate futures.
The need for interest rate futures arose because of failure of exchange traded interest rate futures contracts introduced by the NSE in 2003.
Earlier in 1999, the RBI had also taken initiative to introduce over-the-counter interest rate futures. Taking lessons from experiences of those products, the RBI panel recommended that futures contract initially be based on the 10-year government security yield.
It observed that banks, insurance companies, primary dealer and provident funds, who among them carry almost 88 per cent of interest rate risk on account of exposure to government securities, need a credible institutional hedging mechanism.