What changed
RBI amended its earlier directions to permit IRF contracts on 2-year and 5-year notional coupon-bearing GoI securities, in addition to the existing 10-year and 91-day T-bill contracts. The final settlement price for these cash-settled contracts will be derived from yields of a basket of GoI securities, with yields determined through a structured polling process by FIMMDA involving Primary Dealers.
What it means for you
Banks and market participants now have more granular hedging tools for shorter-duration interest rate exposure, improving risk management across the yield curve. The polling-based settlement mechanism, with outlier rejection and multiple polling instances, aims to ensure fair and transparent price discovery, reducing manipulation risks. Lenders dealing in government securities can better align their hedging strategies with asset-liability mismatches in the 1.5-5.5 year maturity bucket.
What you must do
- Update internal trading and risk management systems to accommodate the new 2-year and 5-year IRF contracts.
- Ensure your Primary Dealer desk is prepared to participate in FIMMDA polling for settlement yield determination.
- Review hedging policies to incorporate these shorter-tenor IRFs for more precise interest rate risk coverage.
- Coordinate with stock exchanges to understand the basket of securities and residual maturity criteria for each contract.
Who it affects
All market participants trading in interest rate derivatives, Primary Dealers registered with RBI, Banks and financial institutions with government securities portfolios, Stock exchanges offering IRF contracts
How is the final settlement yield determined for these new IRFs?
FIMMDA polls yields from ten randomly selected Primary Dealers at 11:00 AM, 11:30 AM, and 12:00 PM on the polling date. For each bond, the two highest and two lowest buy and sell yields are rejected as outliers. The simple average of the remaining yields (after rounding to four decimal places) becomes the settlement yield.
What are the residual maturity ranges for the underlying securities?
For the 2-year IRF, the basket includes GoI securities with residual maturity between 1.5 and 2.5 years. For the 5-year IRF, the range is 4.5 to 5.5 years. Residual maturity is calculated from the contract expiry date to the security's maturity date.
Are these directions still in effect?
No, these directions have been superseded by the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019. However, the framework established here laid the foundation for current IRF market practices.