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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 ..... ment Security with a 10 year maturity and a Notional Treasury Bill with a maturity of 91 days or three months. 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 Excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange, under a GNU General Public License or under any other license that is not more restrictive than the General Public License. This requirement shall also extend to source codes and algorithm in any pre and post processing that may be carried out before or after the actual 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... futures contract. On the first day of interest rate futures trading, the formula given above would require a value of st-1, i.e. the estimated volatility at the end of the day preceding the first day of interest rate futures trading. This shall be obtained as follows: (a) The standard deviation of returns of the prices of Notional Bonds, priced using the zero coupon yield curve, in the last one year shall be computed. (b) The standard 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an open position of one third (1/3rd) of the mark to market value of the far month contract. As the near month contract approaches expiry, the spread shall be treated as a naked position in the far month contract three days prior to the expiry of the near month contract. D) Real Time Computation Initially, the zero coupon yield curve shall be computed at the end of the day. However, the Exchange / yield curve provider shall endeavour to compute the zero coupon yield curve on a real time basis or at least several times during the course of the day. Margins computed on the basis 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 onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : i) Symbol ii) Underlying - The definition of the underlying would include the specification of the yield curve provider and the broad methodology for yield curve estimation. iii) Multiplier iv) Last Trading Day v) Margins, including procedure for intra-day or beginning of day margin calls, if any. vi) Methodology for calculating closing price for mark to market settlement. vii) Methodology for calculating closing price at time of expiry b) Trading Hours the economic purpose it is intended to serve, c) likely contribution to market development, d) the safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading, e) the infrastructure of the exchange and the surveillance system to effectively monitor trading in Interest Rate Derivative Contracts, f) details of settlement procedures systems with regard to Interest Rate Derivative Contracts, g) details of the methodology used for computing the zero c ..... 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