Trading in bond futures

gains traction
In December, daily average volume rises 3 times over Jan-June to ~3,405 cr
SNEHA PADIYATH & SAMIE MODAK
Mumbai, 19 January

ond futures, used to

hedge against and speculate on interest rate
changes by the central bank,
saw a sharp increase in volumes in the weeks leading up
to a rate cut by the Reserve
Bank of India (RBI). In
December last year, exchanges
clocked a daily average
turnover of ~3,405 crore in the
interest rate futures (IRFs) segment, about thrice the average
daily volume for the first six
months of the year.
The underlying security
offered for IRFs is the bench-

mark 10-year government

security and the 91-day treasury bill. The 10-year security
saw a sharp rally last month,
amid easing inflation and hope
of an interest rate cut by RBI.
Last week, the central bank
announced a 25-basis point cut
in the key policy rate, which
led to further gains in bond
prices. So far this month, the
daily average turnover for bond
futures is at about ~2,500 crore.
IRFs, introduced at the
beginning of 2014, gathered
momentum as market participation turned wider and unidirectional movement of the
underlying enabled view-taking...the participation picked

up significantly and, across

investor categories. With a rally in government bonds, most
days witnessed net-buy trades,
said Jagdeep Kannarath and
Prithwiraj Dutta, analysts at
Edelweiss.
In January 2014, IRFs were
launched for a third time.
Trading in the instrument had
failed to take off in two previous
attempts. The success of the
instrument is considered vital to
deepening Indias bond market.
Ashish Ghiya, managing
director, Derivium Capital &
Securities, said bond futures volumes could rise further if certain regulatory issues hindering
the participation of large domes-

BONDS FUTURE IS BRIGHT

Daily average trading turnover of bond futures has seen a spurt

IRF trading volumes in ~ cr

BSE

MCX

NSE (In brackets: Total)

109

405
883
(1,397)
Jan,14
64 109
Feb,14
508
(681)
18 62
Mar,14 642
(722)
66 25
Apr,14 1,035
(1,127)
72 10
May,14 1,007
(1,090)
59 6
Jun, 14 1,197
(1,262)
36 24
(1,454)
Jul,14 1,394
10
1,490
Aug,14 318
71 1
(887)
Sep,14 815
109
(1,433)
1,324
Oct,14
1
Nov,14 162 2,049
3,059
Dec,14 347
190
2,362
Jan,15

(1,813)

(2,212)
(3,406)
(2,552)

Source: Exchange

tic investors were addressed.

There is high interest in bond
futures. This is the time to
remove certain irritants, as this
will unleash the true potential
of the instrument, he said, highlighting the absence of big-balance-sheet players. The participation
of
insurance
companies is minuscule due to
regulator ambiguity. MFs, sitting on huge bond portfolios,
arent big participants. About 70
per cent of state-owned banks
are barely active, he added.
Experts say most insurers
and mutual fund houses are
unsure what extent of their
exposure to IRFs can be hedged,
as the measures prescribed by
the Insurance Regulatory and
Development Authority of India
and the Securities and Exchange
Board of India arent clear on the
flexibility to trade in these.
Differences in lot-sizes led to liquidity issues, they added.
A senior executive at a fund
house said, Certain players,
such as mutual funds, are
allowed to participate in the
IRF market for hedging, the
condition being they
should hold the underlying security. Instead
of the exact underlying security, the regulators should allow
hedging for all similar-tenured securities.
The underlying securities offered in the IRF market
should be expanded further,
the executive added.