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Monday, March 07, 2011

A big step forward on interest rate derivatives

For the backdrop, here are two key facts. First, the failures of policy in the field of interest rate derivatives have led to a peculiar situation where substantial trading on the INR yield curve now takes place outside India. Second, while RBI has permitted one exchange traded interest rate derivative product, there are a host of problems with this contract. The process of policy reform in this field has been a disappointing experience. RBI seems to have quaint notions that cash settlement is harmful, that derivatives trading on short-dated bonds could interfere with monetary policy, etc.

In this setting, here's a big move today: cash-settled futures on the 91-day treasury bill. In a nutshell, it will cash-settle to the price of the 91-day treasury bills (details yet to be announced).

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