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Home » General » General » LIC, Central Bank to help infuse liquidity in IRF Market: Will it work? |
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LIC, Central Bank to help infuse liquidity in IRF Market: Will it work?
by Irfan Khan | December 22,2009 - 05:56 PM
Topics : General
Industries : General
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India’s second attempt at kick starting the Interest rate futures market has still not picked up. It started with a healthy volume of more than 250 crore on the first trading day but volume graph has drifted down to current levels of 10-20 crore daily.
One of the stated key reasons: Settlement Mechanism.
The IRF’s follow physical settlement mechanism. Currently, regulators have introduced IRF trading only on long-dated securities i.e. the underlying is 10-year notional coupon bearing security with a notional coupon of 7% with semi-annual compounding. The trades would be settled by physical delivery of bonds that have been classified as deliverable grade of securities – includes any government security with a maturity between 7.5 yrs to 15 yrs and with an outstanding stock of 10000 crore.
Since the settlement is in bonds, not cash, and since the maturity of the bond to be delivered can vary between seven to 15 years, chances are that the bond most likely to be delivered will not be among the most liquid: the seller follows the principle of “cheapest to deliver”. Thus, current regulations are skewed in favor of the sellers of futures, thus putting buyers at a disadvantage.
Now, with LIC and Central bank promising to support transactions on the buying side, the buyer of IRF will have an open window to liquidate the securities received as a part of IRF settlement although at a small yield spread over official valuation rates. This is expected to reduce fear of IRF buyers of getting stuck with illiquid instruments.
But is this the only reason for low volumes? I believe not. It solves only part of the equation.
Financial Inclusion:
Although RBI has allowed wide range of market participants including banks, financial institutions, insurance companies, pension funds, primary dealers, brokerage houses as well as individual traders to participate in the market, there is very little understanding of the product among a lot of participants.
For eg. If you expect a retail trader to take a position in interest rate future to hedge his interest rate risk on home loan, he won’t do it. It’s just too complicated for him to spend time and energy on. So don’t expect volumes from these traders till the time a proper awareness is created about such a product.
The other type of retail trader who participates is a day trader. These day traders like volatility; large swings in prices help them make money. Trading in bonds does not have the same large intraday swings, so interest from them will also be limited.
Settlement Process Duration:
Another reason is duration for settlement. The settlement in IRF’s is not done on one exact date but over a period of 15 days. It makes things difficult for banks to manage carry costs during the settlement period. The buyer incurs a ‘carry’ cost everyday of that period which is the cost of funds used in the transaction. That has an impact on the price of the transaction, and the uncertainty associated with not knowing the exact date of delivery.
Lack of Short term products:
RBI has currently introduced only long dated interest rate futures. However, short term securities market in India is more vibrant in terms of breadth of participation. Even in US, short term interest rate futures such as 90-day T-Bill and 3-month Euro Dollar time deposits are more popular.
Earlier RBI Committee report talked about short dated interest rate future contract. They are 91-day Treasury Bill futures and short-term interest rate futures based on an index of actual call money market rates. These would attract more participants as the call money market is more vibrant as compared to repo market for 10 year G-Secs. However, these were scrapped in the final report.
Once these products are also introduced, the debt markets in India would have truly taken a leap forward. It would attract speculators too, making price discovery better and the debt market more complete and liquid.
Technological Issues:
Reportedly, the platform on which banks manage their portfolio of investments is different from the one-used for IRF-type transactions. Secondly, back-office MIS and regulatory requirements — such as keeping trading bond portfolios separate from hold-to-maturity bond portfolios — have to be planned for and managed.
Interest Rate View:
There was a flurry of rate cuts this year by RBI as a part of global Quantitative Easing. Markets have resurged; public confidence has been re-instated now. With Inflation rising at a faster than expected pace, the only way rates are headed is NORTH. So everybody is on the same side of the market.
There’s a long long way to go for IRF market. Just to give a comparable, on organised exchanges globally, the principal value of interest rate futures amount to nearly $18 trillion, or 30 times the size of the equity index derivatives market of $600 billion. The turnover on these exchanges is over $218 trillion, compared to the turnover in equity derivatives of nearly $20 trillion.
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Symphony Service Acquires US Based CoreObjects Software
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September 09, 2010, 04:05 PM | Deeshesh Chheda
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Bangalore-based Symphony Service Corporation has acquired CoreObjects Software Inc, a Los Angeles-based new product development services provider, that specialises in bringing commercially deployable products to market.
With CoreObjects’ engineering delivery centers in Bangalore and Pune, India and its team of highly skilled full-time product engineers and deep vertical market expertise, Symphony Services will expand its offerings in the product development and embedded product development space.
This acquisition also provides Symphony Services access to additional re-usable components and frameworks for product development, including CoreObjects' Smart Objects suite of software assets designed to speed clients' products to market.
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