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Interest Rate Futures

June, 2015
• Interest rate and interest rate risk
• Mitigation of interest rate risk
• Interest rate future – Global perspective
• NSE Bond Futures
• Importance of NBF-II
What is Interest Rate?
• The amount charged, expressed as a percentage of principal, by a lender
to a borrower for the use of assets.
• Interest rates are typically noted on an annual basis
• The assets borrowed could include, cash, consumer goods, large assets,
such as a vehicle or building.
• Interest is essentially a rental, or leasing charge to the borrower, for the
asset's use.
• Rate of interest influence by various factor
Factors affecting interest rate
• Money Demand and Supply
• Monetary Policy
• Inflation
• Economy
• Fiscal Deficit
• Global Liquidity
• Uncertainty in Economic Growth
• Generally, RBI influences the interest rates by altering the liquidity in the
10 yr Benchmark &Repo Rate - Correlation
Interest Rate Risk
• Interest rate risk is the uncertainty in the movement of the interest rates.
• Both way movement of interest rate will impact the participants
• The volatility of interest rates has increased manifold in the last few years.
• Interest rate risk can impact your assets and liabilities; whether you are an
individual, corporate, institution or trading member.

– Do you have bond portfolio

– Do you have a bank fixed deposit?
– Do you have investments in a debt mutual fund?
– Have you taken a home loan?
– Are you an investor in a tax free bond?
– What is your loan profile as a corporate?
– As a corporate have you parked your surplus funds in a mutual fund?
– Are you invested in the Bank Nifty?
Mitigation of Interest Rate Risk
• Tools available for hedging interest rate risk
– Interest rate swap
– Floating rate bonds
– Interest rate futures
• Interest rate swaps are restricted to the bank and institutional segment.
Dominated by foreign and private sector banks
• Floating rate bonds –not easily accessible to the non-institutional segment
• Interest rate futures-futures contract is similar to a forward, but it provides the
counterparties with less risk than a forward contract, namely a lessening of default
and liquidity risk due to the inclusion of an intermediary.

• These products all provide ways to hedge interest rate risk, with different products
being appropriate for different scenarios.
Interest Rate Futures
• Important tool for mitigate interest rate risk
• Interest rate futures contracts are one of the most successful innovations in
futures trading.
• A futures contract with an underlying instrument that pays interest.
• An interest rate future is a contract between the buyer and seller agreeing to
the future delivery of any interest-bearing asset.
• The interest rate future allows the buyer and seller to lock in the price of the
interest-bearing asset for a future date.
Interest Rate Futures – The Global Perspective
Financial Derivatives Data – 2014 (Q3)

Product Specification
• Notional Bond future
• Physical / Cash Settlement
• Major institutional participation
• Product for various maturity

Major Products
• CBOE T-Bills futures (10-yr)
• Eurodollar futures (3 month)
• Euribor futures (NYSE Liffe)(3month)
• KTB Futures(KRX Korea Exchange)(10-yr)
Interest Rate Futures – The Indian Story
Indian Market
• In India Equity derivatives have been successful and have grown to a significant size
about 11 years after their launch. The currency derivatives segment is also liquid.
And there is a fair amount of trading in commodity derivatives as well.
• Despite repeated attempts, trading in interest rate derivatives has failed to take off.
– In 2003, the National Stock Exchange introduced interest rate futures contracts that were
priced off a zero coupon yield curve.
– The long term IRFs were re-launched on August 31, 2009 at NSE as the ‘Notional 10 Years
Government of India Securities Futures.
– In 2011, Exchange launch cash settled 91-day T-Bills futures
– RBI issue guideline on future on 2-yr and 5-yr GOI cash settled bonds, however no product
launch on the same
• New guidelines –December 2013
– On 10-Year Government of India (GoI) security
– Cash settled
– Two different designs are permitted
• Option A : Futures based on single GoI security
• Options B : Futures based on basket of GoI securities
– Stock Exchanges can choose either or both
Salient Features
• Cash settled interest rate futures
• Contract based on a single bond
– 9-10 yr maturity GOI bond
• Centralized clearing supported by guaranteed settlement
• Settlement at clean price
• Easier and cheaper access to rates trading
• Useful to all types of investors
• Minimal exchange levied transactions costs
– Margins based on actual volatility
– STT not applicable
– SEBI Turnover Charges as applicable
Contract Specifications
Attributes Contract Details
Underlying GOI Securities with 9-10 year maturity
8.40% GOI 2024 (Maturity – July 2024); 7.72% GS 2025 (Maturity – May 2025)
Market Type N
Symbol The symbol shall denote coupon, type of bond and maturity year. For example an
8.40% Central Government Security maturing on July 25, 2024 shall be denoted as
Instrument Type FUTIRC
Unit of Trading 1 Lot - (1 lot is equal to 2000 bonds with notional bonds of FV Rs.0.2 Million or 2
Quotation Price based (derived from underlying Clean Price)
Contract Value 1 Contract shall be equal to Quoted price * 2000
Tick Size Rs.0.0025
Quantity Freeze 1251 lots
Contract Specifications
Attributes Contract Details
Trading Hours Monday to Friday: 9:00 a.m. to 5:00 p.m.
(The trading hours aligned with underlying market in case of market extension)
Trading Cycle Three serial monthly contracts
Expiry Day Last Thursday of the Month. In case the last Thursday is a trading holiday, the
previous trading day shall be the expiry / last trading day
Base Price Theoretical price of the 1st day of the contract.
On all other days, Daily Settlement Price of the contract
Price operating range +/- 3% of the base price. (Whenever a trade in any contract is executed at the
highest/lowest price of the band, Exchange may expand the price band for that
contract by 0.5% in that direction after 30 minutes after taking into account market
trend. Price band may be relaxed only 2 times during the day)
Exchange Level Overall Rs. 250 Billion (Rs.25,000 crores) or 25% of the outstanding of underlying bond
Position Limit whichever is higher.
Contract Specifications
Attributes Contract Details

Initial Margin SPAN Based Margin (Min 1.5% )

Extreme loss margin 0.5% of the value of the gross open positions

Daily Settlement Daily MTM settlement on T+1 in cash based on daily settlement price

Daily Settlement Price Volume Weighted Average Futures Price of last half an hour or Theoretical Price

Final Settlement Final settlement on T+1 day in cash based on final settlement price

Final Settlement Price Weighted average price of the underlying bond based on the prices during the last
two hours of the trading on NDS-OM. If less than 5 trades are executed in the
underlying bond during the last two hours of trading, then FIMMDA price shall be
used for final settlement

Spread Trading Facility for spread trading. Margin Rs. 800 for a one month spread and Rs.1200 for a
two month spread.
Who can Participate?
Participant Regulation Major Strategies

Hedging, Arbitrage, View Based Trading, Changing duration of

Banks Hedging and Trading
portfolio, Calendar Spread, Lock In of Yield
Primary Hedging and Trading Hedging, Arbitrage, View Based Trading, Changing duration of
Dealers portfolio, Calendar Spread, Lock In of Yield
Hedging, View Based Trading, Calendar Spread, Lock In of Yield,
FPI’s Hedging . Restricted trading
changing duration of portfolio
Mutual Funds Hedging, Exposure Hedging, View based trading

Hedging Future Cashflows Long Hedge

Corporates Hedging and Trading Hedging, View Based Trading, lock in of yield etc.

NBFC’s Hedging Hedging, Changing duration of portfolio

Individuals Hedging and Trading Hedging, View Based Trading, Lock In of Yield etc.
Hedging and Trading Hedging, View Based Trading, Calendar Spread, etc.
Position Limits
• Trading Members
– Greater of 10% of OI or INR 600 crores
– Real time alerts
• Clients
– Greater of 3% of OI or INR 200 crores
– End of day monitoring
• FPI’s- The total gross short (sold) position of each FII / FPI in IRF shall not exceed its long
position in the government securities and in Interest Rate Futures, at any point in time. The
total gross long (bought) position in cash and IRF markets taken together for all FII / FPIs shall
not exceed the aggregate permissible limit for investment in government securities for FII /
– For FPI 1 and 2 - 10% of the total open interest or INR 600 crores, whichever is higher
– FPI 3 Clients - 3 % of the total open interest or INR 200 Crores, whichever is higher
– FPI’s shall ensure compliance with the above limits
• Mutual funds – They are allowed to participate as clients however the position limits will be
applicable as per the below –
– Fund Level –10% of the total open interest or INR 600 crores, whichever is higher
– Scheme Level - 3 % of the total open interest or INR 200 Crores, whichever is higher
Trading System
• Get Connected
– NEAT Plus
• Anonymous Trading System
• Market Information
– Trade ticker
– Market Watch
o Best buy/ sell order price and contracts
o Last Traded Price & yield
o Open Interest
– Market by price
– Outstanding orders
– Previous trades
– End of day prices
– Underlying price information
– Futures price calculator (price and yield)
Clearing & Settlement
• Cash Settled
• Clearing & Settlement by NSCCL
• Settlement Guarantee
• On-line Risk management
• Trading based on Exposure
• Facility to trade through multiple broker and settlement through single clearing
• Daily mark to market settlement
– Daily settlement Price
• Last half an hour weighted average price
– T+1 Basis on Cash
• Final settlement
– Final settlement price
• weighted average price the last two hours of trading on NDS-OM
– T+1 Basis on Cash
Theoretical Price
• Theoretical Futures Price = Cash price + Financing cost - Income on cash

• Cash price of the underlying = Clean price + Accrued interest

• Financing cost = Financing cost for the period on Cash price

• Income on cash position = Accrued interest expected to be received on

expiry + Coupon payment + Interest on coupon payment

• The component of coupon payment and interest on coupon payment are

applicable in case of any coupon payments falling during the holding
NBF-II Growth – 5th June, 2015
EOD Prices –
NBF II Near Month v/s Underlying
EOD Prices –
NBF II Near Month v/s Underlying
Market Share - 5th June, 2015
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