InterestRateFutures.pdf - SECTION 3 MARKET TRENDS Manish Bansal Assistant General Manager Securities and Exchange Board of India Interest Rate Futures

InterestRateFutures.pdf - SECTION 3 MARKET TRENDS Manish...

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122 Interest Rate Futures Manish Bansal Assistant General Manager, Securities and Exchange Board of India S ECTION 3 : M ARKET T RENDS The introduction of trading in interest rate futures in the country heralds the beginning of a new era in the fixed income derivatives market. Initial hiccups with regard to the product design and variations from the global standards would settle down over a period of time and the product would emerge as a path breaker, paving the way for many more initiatives on the derivatives front…… The introduction of trading in interest rate futures in India is one more step towards integration of the Indian Securities Market with the rest of the world. Globally, interest rate derivatives are the darlings of the market and account for around 70% of the total derivatives transactions across the economies. In India, it may be seen as a path breaking initiative because it is expected to pave the way for various innovations at the derivatives front in the time to come. Although market participants have unanimously appreciated the initiative, there appears to exist certain apprehensions in their mind with regard to the product design. This work attempts to address those issues. Accordingly, this article concentrates on interest rate products in the global context, their structure in the Indian market, points of differences and how to look at them. Introduction to interest rate futures We all are familiar with forward contracts. They are essentially over-the-counter (OTC) contracts traded on one to one basis among the parties involved, for settlement on a future date. The terms of these contracts are decided by the parties mutually at the time of their initiation. If a forward contract is entered into through an exchange, traded on the exchange and settled through the Clearing Corporation/ House of the exchange, it becomes a futures contract. As one of the most important objectives behind bringing the contract to the exchange is to create marketability, futures contracts are standardized contracts so designed by the exchanges as to ensure participation of a wide range of market participants. In other words, futures contracts are standardized forward contracts traded on the exchanges and settled through their clearing corporation/house. Futures contracts being standardized contracts appeal to a wide range of market participants and are therefore very liquid. On the other hand, the clearing corporation/house, in addition to settling the futures contracts, becomes the counter-party to all such trades or provides unconditional guarantee for their settlement, thereby ensuring financial integrity of the entire system. Therefore, although futures contracts take away the flexibility of the parties in terms of designing the contract, they offer competitive Manish Bansal is Assistant General Manager in Securities and Exchange Board of India (SEBI). He has more than 9 years of professional experience spanning across wide spectrum of the financial markets.
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