SEBI revises norms for exchange traded interest rate futures

In December 2013, the market regulator prescribed the framework for Stock Exchanges to launch cash settled Interest Rate Futures on 10-year G-sec

January 21, 2014 10:56 IST | India Infoline News Service
The Securities and Exchange Board of India (SEBI) has put in place a mechanism to monitor investments by foreign institutional investors (FIIs) in exchange-traded interest rate futures (IRFs) to ensure they do not exceed regulatory limits.

In December 2013, the market regulator prescribed the framework for Stock Exchanges to launch cash settled Interest Rate Futures on 10-year G-sec. “The gross open positions of the FII across all contracts shall not exceed 10% of the total open interest or INR 600 crores, whichever is higher,” the SEBI circular had said.

The total gross short (sold) position of each FII 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 FIIs shall not exceed the aggregate permissible limit for investment in government securities for FIIs, SEBI had added.

“FIIs shall ensure compliance with the above limits. Stringent action shall be taken against FII in case of violation of the limits,” SEBI said further.

In July 2012, SEBI had put in place mechanism for monitoring and enforcing limits of FIIs in Government Securities and corporate bonds by directing depositories to disseminate information regarding the total FII investment values in Government and corporate bonds.
It had been decided in consultation with RBI that this monitoring mechanism shall also incorporate monitoring of gross long positions of FIIs in IRF.

As a result, stock exchanges shall provide information regarding aggregate gross long position in the interest rate futures of all FIIs taken together at the end of the day to the depositories - NSDL and CDSL.

The two depositories shall aggregate the gross long position of FIIs in IRFs in each exchange and add it with the investment of FIIs in government debt to monitor adherence to the regulatory limit.

When the total of cash and IRF of all FIIs reaches 85 per cent of the permissible limit, the NSDL and CDSL shall inform the RBI, Sebi and the stock exchanges.

Once 90% of limit is utilized, NSDL and CDSL shall inform RBI, SEBI and Stock Exchanges about the same. Stock Exchanges shall notify the same to the market and thereafter FIIs shall not further increase their long position in IRF till the time the overall long position of FIIs in cash and IRF comes below 85% of existing permissible limit.

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