Who: PG Apte Working Group Report on Introduction of Interest Rate Options in India
What: Released by RBI
When: 8 February 2016
The Reserve Bank of India (RBI) on 8 February 2016 released the Report of the Working Group on Introduction of Interest Rate Options in India. The report was prepared by RBI committee chaired by Prof PG Apte.
Key recommendations of the Apte Committee
• To begin with, simple call and put Options, caps, floors, collars and swaptions may be permitted. Complex structures may be introduced subsequently.
• Both Over-the-Counter (OTC) as well as exchange traded options may be introduced. While in the OTC segment only European options may be permitted, both American and European structures may be permitted on Exchanges.
• Fixed Income Money Market and Derivatives Association of India (FIMMDA)/Financial Benchmark India Private Limited (FBIL) may come out with the list of eligible domestic money or debt market rates as benchmarks like G-Sec, T-Bills, MIBOR,OIS, MIFOR, IRF etc.
• While banks, PDs and other regulated entities having sound financials and prudent risk management may be allowed as market makers subject to the approval of concerned regulator, all domestic entities having underlying interest rate risk may be permitted as users.
• While no documentation relating to underlying exposure may be required for exposures up to 5 crore rupees, large corporate may also be allowed to take hedging positions for their anticipated interest rate exposures.
• The minimum lot size of the contract is to be kept at 2 lakh rupees on Exchanges and on the OTC, it is 5 crore rupees and in multiples of 5 crore rupees thereof among the market makers. Transactions between user and market maker may be standardized.
The RBI placed the recommendations of the panel for comments, which can be emailed by 26 February 2016. Final guidelines will be issued by the end March 2016 taking into account the feedback received.
The Working Group under Chairmanship of Prof PG Apte was constituted by the Technical Advisory Committee (TAC) of the Reserve Bank on Financial markets on 21 April 2015. The Working Group was tasked to comprehensively look into all relevant issues and give recommendations on the framework for introduction of Interest Rate Options in India.
At present, interest rate derivatives (IRD) in India exists only in the form of Interest Rate Swap (IRS) and Forward Rate Agreement (FRA) in the OTC segment and Interest Rate Futures (IRF) on the Exchanges. These were made available by the RBI in 1999.
IRS market has evolved over a period of time and is fairly liquid. Trading in IRF market has gradually increased with wider participation by different categories of participants. These IRDs can be used by the banks and other market participants to manage market risk effectively in their books.
However, the financial entities, including banks, do not have any instruments to manage the embedded options on their balance sheets.