REPORT OF THE RBI-SEBI STANDING TECHNICAL COMMITTEE
ON
INTEREST RATE FUTURES
Need for Interest Rate Futures
Interest rate risk affects not only the financial sector, but also the corporate and
household sectors. As observed in the Report on Interest Rate Futures, banks,insurance companies, primary dealers and provident funds bear a major portion of the interest rate risk on account of their exposure to government securities. As such these entities need a credible institutional hedging mechanism1. Today, with a large stock of household financial savings on the assets side and an increasing quantum of housing loans on the liabilities side, interest rate risk is becoming increasingly important for the household sector as well. Moreover, because of the Fisher effect2, interest rate products are the primary instruments available to hedge inflation risk which is typically the single most important macroeconomic risk faced by the household sector3. In this context, therefore, it is important that the financial system provides the household sector greater access to interest rate risk management tools through Exchange-Traded interest rate derivatives.
Benefits of Exchange-Traded Interest Rate Derivatives
Interest rate futures, a derivative instrument with linear pay-offs, provide benefits
typical to any Exchange-Traded product, such as:
a. Standardization – Through standardization, the Exchanges offer market
participants a mechanism for gauging the utility and effectiveness of different
positions and strategies.
b. Transparency – Transparency, efficiency and accessibility is accentuated
through online real time dissemination of prices available for all to see and
daily mark-to-market discipline.
c. Counter-party Risk – The credit guarantee of the clearing house eliminates
counter party risk thereby increasing the capital efficiency of the market
participants.
http://rbidocs.rbi.org.in/rdocs/PublicationReport/PDFs/IRFF_170609.pdf
ON
INTEREST RATE FUTURES
Need for Interest Rate Futures
Interest rate risk affects not only the financial sector, but also the corporate and
household sectors. As observed in the Report on Interest Rate Futures, banks,insurance companies, primary dealers and provident funds bear a major portion of the interest rate risk on account of their exposure to government securities. As such these entities need a credible institutional hedging mechanism1. Today, with a large stock of household financial savings on the assets side and an increasing quantum of housing loans on the liabilities side, interest rate risk is becoming increasingly important for the household sector as well. Moreover, because of the Fisher effect2, interest rate products are the primary instruments available to hedge inflation risk which is typically the single most important macroeconomic risk faced by the household sector3. In this context, therefore, it is important that the financial system provides the household sector greater access to interest rate risk management tools through Exchange-Traded interest rate derivatives.
Benefits of Exchange-Traded Interest Rate Derivatives
Interest rate futures, a derivative instrument with linear pay-offs, provide benefits
typical to any Exchange-Traded product, such as:
a. Standardization – Through standardization, the Exchanges offer market
participants a mechanism for gauging the utility and effectiveness of different
positions and strategies.
b. Transparency – Transparency, efficiency and accessibility is accentuated
through online real time dissemination of prices available for all to see and
daily mark-to-market discipline.
c. Counter-party Risk – The credit guarantee of the clearing house eliminates
counter party risk thereby increasing the capital efficiency of the market
participants.
http://rbidocs.rbi.org.in/rdocs/PublicationReport/PDFs/IRFF_170609.pdf
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