SEBI allows exchanges to launch futures contracts in corporate bond indices

Stock exchanges can launch futures contracts on corporate bond indices, according to a circular by the capital markets regulator Securities and Exchange Board of India (SEBI).

The SEBI circular dated January 10 stated that the stock exchanges can introduce contracts of up to a tenure of three years. The bourses can introduce derivative contracts on indices of corporate debt securities rated AA+ and above.

The corporate bond index should be composed of debt securities and the constituents of the index should have adequate liquidity and diversification at the issuer level.

The constituents of the index should be periodically reviewed.

SEBI has stated that there should be a minimum of eight issuers in the index and a single issuer should not have more than 15 percent weight in the index.

Also, the index should not have more than 25 percent weight in a particular group of issuers. However,  securities issued by public sector undertakings, public financial institutions, and public sector banks would be excluded from this provision.

The circular stated that the value of the Cash Settled Corporate Bond Index Futures (CBIF) contracts shall not be less than Rs 2 lakh at the time of introduction.

Stock exchanges need to set an initial price band at 5 percent of the previous closing price or base price for every CBIF,  preventing acceptance of orders for execution that are placed beyond the set band. SEBI has fixed the trading hours between 9 AM and 5 PM on all working days from Monday to Friday.

Stock exchanges will have to submit a detailed proposal to the regulator for approval, giving details of the underlying corporate bond index, the index methodology, contract specifications, applicable trading, clearing and settlement mechanism, risk management framework, the safeguards to ensure market integrity, investor protection, and surveillance systems.