Sebi nod for future contracts on corporate bond indices

Sebi nod for future contracts on corporate bond indices

By Siddhant Mishra

The Securities and Exchange Board of India (Sebi) on Tuesday gave its approval to the exchanges for introducing  future contracts on corporate bond indices.

This has been done with a view to enhance liquidity in the bond market and provide investors with the opportunity to hedge their positions.

Sebi has stipulated in the circular that constituents of the index should have adequate liquidity and diversification at the issuer level, and be periodically reviewed.

They have to be aggregated at the issuer level for determining exposure limits. It has mandated that there should be at least eight issuers in the index — which should have a track record of at least a year — with no single issuer having more than 15% weight. The index itself cannot have above 25% weight in a particular group of issuers or a particular sector (excluding securities issued by PSUs, PSBs, and PFIs).

The daily settlement price shall be the volume-weighted average price of the last half an hour, while the final settlement price shall be the closing price of the underlying index on the expiry date.

For every future contract, the exchanges have been directed to set an initial price band at 5% of the previous closing price/base price, thus preventing acceptance of orders for execution that are placed beyond the set band.

Whenever a trade in any contract is executed at the highest or lowest price of the band, exchanges may — after considering the market trend — expand the price band for that contract by 0.5% in that particular direction after 30 minutes, subject to two expansions a day.

For trading members, MFs, insurance firms, housing financiers, pension funds, banks and primary dealers, and Category I and II FPIs, the open position limit across contracts within the respective underlying index has been capped at 10% of the total open interest or `1,200 crore (whichever is higher).

For non-institutions in category II FPIs, and scheme-level MFs, and others, the position limit has been capped at 3% of the open interest, of `400 crore (whichever is higher).