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TMI BlogScheme for introduction of Exchange Traded Interest Rate Derivative ContractsX X X X Extracts X X X X X X X X Extracts X X X X ..... nths. SEBI Group on Secondary Market Risk Management (RMG) considered the specification of the initial set of interest rate derivative contracts to be introduced and the risk containment measures to be adopted for such derivative contracts. The recommendations of the RMG were a part of a 'Consultative Document' prepared by the RMG and placed on the SEBI web site for public comments. The recommendations of the RMG as regard the derivative contract and the risk containment measures were also placed before the SEBI Board. The risk containment measures and the scheme for introduction of futures contracts on a Notional Government Security with 10 year maturity (hereinafter referred to as a Long Bond Future) and a Notional Treasury Bill (hereinafter referred to as a Notional T-Bill Futures) are as follows- I) PRODUCT SPECIFICATION 1) The Interest Rate Derivative Contracts to be traded on the derivative exchange/segment and settled through the Clearing house/corporation of the Exchange (herein after collectively referred to as Exchange) shall have prior approval of SEBI. The Contract should comply with the disclosure and other requirements, if any, specified by SEBI from time to ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimation itself. iii) The Exchange shall make available on the web site a set of at least 25 trading days (i.e. one month) of data suites for the input data. Each day's data suite shall include traded prices and other transaction data that is input into the estimation / pre-processing/post-procession algorithm. iv) The full time-series of yield curve parameters shall be made available on the web site of the Exchange/yield curve provider, for a period extending back atleast to April 1, 1999. v) Major changes in the estimation process shall be implemented after giving due notice to the market and providing the appropriate back tests. vi) For the Long Bond Future, the estimation shall target, within a period of six months from the date of launch of futures contract, a mean pricing error for liquid bonds of not more that 2 basis points of yield for all liquid bonds. The mean pricing error would be calculated as the simple arithmetic mean over a one month period of the daily mean pricing errors, which in turn shall be calculated as the simple arithmetic mean of the absolute pricing errors (in basis points of yield) of the bonds that were liquid on that day. Liquid bonds may be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deviation shall be set as the volatility estimate at the beginning of that one year period. (c) Move forward through the year, one day at a time, using the formula above to get the estimated volatility at the end of that day using prices of the Notional bonds computed of that days zero coupon yield curve. (d) The estimated volatility by this method at the end of the day preceding the first day of interest rate derivative trading would be the value of st-1 to be used in the formula given above at the end of the first day of futures trading. Thereafter each day's estimate st becomes the st-1 for the next day. The "return" (rt) is defined as the logarithmic return: rt = ln(It/It-1) where It is the interest rate futures price at time t. The return (rt) used in the formula shall be computed using the prices of the near month interest rate futures contract. A parallel estimation of volatility shall be done using the prices of the notional bonds computed off the zero coupon yield curve and the near month interest rate futures prices, and the higher of the two volatility measures would be used to set margins. The Initial Margin requirement shall be netted at level of individual clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the latest available yield curve shall be applied to member/client portfolios on a real time basis. Exchanges may also choose to compute the end of day margins on the basis of a provisional yield curve (for example based only on t+0 trades) because the final end of day yield curve becomes available only late in the evening. If so, exchanges shall specify and disclose the conditions under which a margin call shall be made next morning to deal with large deviations between the provisional and final yield curves. It is expected that such intra day margin calls shall be necessary only on a small number of days each year. E) Margin Collection and Enforcement As prescribed in the case of index futures contract, the mark to market settlement margin for Interest Rate Futures Contracts shall be collected before start of the next day's trading, in cash. If mark to market margins is not collected before start of the next day's trading, the clearing corporation/house shall collect correspondingly higher initial margin to cover the potential for losses over the time elapsed in the collection of margins. The higher initial margin shall be calculated in the same manner as specified in the Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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