MUMBAI: Life Insurance Corporation of India (LIC) and Central Bank of India have offered to support transactions in the interest rates futures
(IRF) market by buying securities from various market participants, the National Stock Exchange announced on Monday. Analysts have been complaining that current regulations are skewed in favour of the sellers of futures, thus putting buyers at a disadvantage. The support from LIC and Central Bank is aimed at plugging this deficit.

The two state-owned entities have committed to purchase securities from members who wish to liquidate the securities received as a part of their IRF obligations, the NSE release said. This means that a buyer of an interest rate future, who receives bonds as part of the physical settlement, can now sell those securities to LIC and Central Bank of India.

Until now, a buyer always had the fear that the securities received in the settlement could be illiquid, making it difficult to encash them. But after Monday’s announcement, he has a ready customer for all such bonds. However, the sale will happen at a small yield spread over the official valuation rates, i.e., a small discount in prices, NSE said.

Stock and currency futures in India are cash-settled, ie, no shares or hard currency change hands. But as per RBI and Sebi regulations, all bond futures are physically settled — so the seller of futures actually delivers bonds to the buyer.

Central Bank of India has also offered securities from its book to members who wish to use them to meet IRF obligations.

“IRF market is expected to see far larger volumes in the coming days, as the promised support from LIC and Central bank of India will remove certain concerns about the physical delivery settlement,” NSE said.

Three months after they were first introduced, the response to the product has been disappointing. Only 2,200 outstanding contracts existed as on Monday and less than Rs 50 crore worth of trade took place on each day in Deecmber. Market participants say NSE has written to the market regulator Sebi calling for cash settlement to bring in volumes.