Market regulator Securities and Exchange Board (Sebi) on Tuesday called for reforms in the underlying market and said regular issuance of government bonds across maturities can go a long way in achieving this by way of increasing liquidity.
“The success of the derivatives market is dependent on the underlying market, which has to be liquid. There have to be reforms in the underlying market as well. There should be regular issuance of government bonds across maturities to make the underlying market of interest rate futures more liquid,” Sebi Chairman UK Sinha said.
Mr. Sinha was speaking at the launch of interest rate futures (IRFs) on the National Stock Exchange.
Mr. Sinha said almost 34 per cent of the public bonds issued by government were held by the banking system. Unless they participate, any produce has little chance to succeed, he said, adding that the three earlier attempts in last 11 years to launch these products failed.
Mr. Sinha said the regulator is also looking into how to provide more liquidity, specially in repo market and the linkage between the currency the interest derivatives market.
He pointed out that some of the measures the regulator has taken in last fiscal, which led to lower volumes in the currency derivatives market, will also be looked into.
“Going forward, I would also hope RBI, Sebi and exchanges together to look at what is needed for development of corporate bond market,” Mr. Sinha said.
The NSE today became the second exchange to launch the IRF, after the privately-promoted MCX did yesterday. The oldest bourse BSE will launch the same on January 28.
Commenting on the IRF launch, Mr. Sinha said, “We see good future for interest rate futures as FIIs, bank insurance companies and mutual funds will participate.”
IRF is a simple and good product. We have given two options of single bond and basket of 10—year bonds. All key exchanges have gone for option of single bonds, which we expect to succeed, Sinha said.
NSE chief Chitra Ramkrishna said, “This product has been designed with feedback that regulators have been receiving from all of you, (addressing market participants) after collaborating and taking inputs from the market. It has been a hugely consultative process and we believe this will be a product every one of you will be able to make use of from day one.”
“The NSE is looking to the future where we can be a single platform which provides bonds, underlying and interest rate futures, swap execution facilities, cash market trading, developing a retail base and a seamless settlement for all of this,” she said.
The bourse is building the infrastructure needed to provide best trading platform. We hope to bring to this space the same depth, breadth and efficiency that other asset classes have today, she added.