SEBI introduces cash-settled rate futures on 10-year government bonds

The Securities and Exchange Board of India (SEBI) has decided to permit stock exchanges to introduce cash settled interest rate futures (IRF) on 10-year Government of India securities.

This has been done in consultation with the Reserve Bank of India (RBI) and after taking into account feedback from market participants and stock exchanges, SEBI said in a release.

SEBI has prescribed two different options for trading in interest rate futures - with coupon bearing Government of India security as underlying and the other with coupon bearing notional 10-year Government of India security with settlement price based on basket of Securities - as underlying, for cash settled futures on 10-year GoI securities.

Exchanges are permitted to launch contracts on either one or both of these options.

SEBI has separately prescribed product specifications, position limits and risk management framework for the cash settled futures.

The cash settled 10-year IRF is being introduced on a pilot basis and the product features would be reviewed based on the experience gained, SEBI said in its release.

Before launching the product, the stock exchange/clearing corporation should submit the proposal to SEBI for approval giving the details of contract specifications, risk management framework, the safeguards and the risk protection mechanisms, the surveillance systems etc.

SEBI, through a circular issued on 28 August 2009, had permitted stock exchanges to launch physically settled futures on 10-year Government of India securities.