Interest Rate Futures. June, 2015

Transcription

1 Interest Rate Futures June, 2015

2 Agenda Interest rate and interest rate risk Mitigation of interest rate risk Interest rate future Global perspective NSE Bond Futures Importance of NBF-II

3 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

4 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 system

5 10 yr Benchmark &Repo Rate - Correlation

6 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?

7 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.

8 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.

9 Interest Rate Futures The Global Perspective

10 Financial Derivatives Data 2014 (Q3) Source:BIS

11 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)

12 Interest Rate Futures The Indian Story

13 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

14

15 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

16 Contract Specifications Attributes Underlying Contract Details GOI Securities with 9-10 year maturity 8.40%GOI2024(Maturity July2024);7.72%GS2025(Maturity May2025) 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 July25, 2024 shall be denoted as 840GS2024 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 Lakhs) Quotation Price based(derived from underlying Clean Price) Contract Value 1 Contract shall be equal to Quoted price * 2000 Tick Size Rs Quantity Freeze 1251 lots

17 Contract Specifications Attributes Trading Hours Trading Cycle Contract Details Monday to Friday: 9:00 a.m. to 5:00 p.m. (The trading hours aligned with underlying market in case of market extension) Three serial monthly contracts Expiry Day Last Thursday of the Month. In case the last Thursday is a trading holiday, the previoustradingdayshallbetheexpiry/lasttradingday 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.pricebandmayberelaxedonly2timesduringtheday) Exchange Level Overall Rs. 250 Billion (Rs.25,000 crores) or 25% of the outstanding of underlying bond Position Limit whichever is higher.

18 Contract Specifications Attributes Contract Details Initial Margin SPAN Based Margin(Min 1.5%) Extreme loss margin Daily Settlement 0.5% of the value of the gross open positions 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.

19 Who can Participate? Participant Regulation Major Strategies Banks Primary Dealers FPI s Hedging and Trading Hedging and Trading Hedging. Restricted trading Hedging, Arbitrage, View Based Trading, Changing duration of portfolio, Calendar Spread, Lock In of Yield Hedging, Arbitrage, View Based Trading, Changing duration of portfolio, Calendar Spread, Lock In of Yield Hedging, View Based Trading, Calendar Spread, Lock In of Yield, changing duration of portfolio Mutual Funds Hedging, Exposure Hedging, View based trading Insurance Companies 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. Trading Members Hedging and Trading Hedging, View Based Trading, Calendar Spread, etc.

20 Trading Members Clients Greater of 10% of OI or INR 600 crores Real time alerts Greater of 3% of OI or INR 200 crores End of day monitoring Position Limits 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 / FPIs. 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

21 Trading System Get Connected NEAT Plus NOW CTCL 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)

22 Cash Settled Clearing & Settlement by NSCCL Settlement Guarantee On-line Risk management Trading based on Exposure Clearing & Settlement Facility to trade through multiple broker and settlement through single clearing member 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

23 Theoretical Price Theoretical Futures Price = Cash price + Financing cost -Income on cash position Where, 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 period

24 NBF-II Growth 5 th June, 2015

25 EOD Prices NBF II Near Month v/s Underlying

26 EOD Prices NBF II Near Month v/s Underlying

27 Market Share -5 th June, 2015

28 Thank Thank You You Contact us us on on : / / Disclaimer Disclaimer Market conditions Information can lead provided to substantial in this presentation profit or loss. is for Investors general are information advised to purpose seek adequate only. product and market The knowledge final product as well specification as proper investment, settlement advice process before and trading. membership The material related provided info would here be is for general information notified purpose through only. While NSE care circulars has been after SEBI taken approval to ensure accuracy, the information furnished to reader with no warranty as to accuracy or completeness of its contents and on condition that any changes, Integrity Customer focused culture Trust, respect and care for the individual Passion for excellence Teamwork