The Securities and Exchange Board of India has allowed exchanges to introduce future contracts on Corporate Bond Indices.
SEBI had constituted a working group of representatives of NSE, BSE and MSEI to enhance liquidity in the bond market and also to provide opportunity to the investors to hedge their positions.
“Based on the submissions made by the working group and recommendations of Secondary Market Advisory Committee of SEBI, it has been decided to permit stock exchanges to introduce derivative contracts on indices of corporate debt securities rated AA+ and above,” SEBI said in late night circular on Tuesday.
The stock exchanges desirous of introducing such contracts should submit a detailed proposal for SEBI’s approval, providing details relating to underlying corporate bond index, the index methodology, contract specifications, applicable trading, clearing & settlement mechanism,risk management framework, the safeguards to ensure market integrity,investor protection,surveillance systems,etc, the circular added.
According to SEBI, the criteria included: Underlying the derivative contract should be composed of corporate debt securities; constituents should have adequate liquidity and diversification at issuer level, as decided by the stock exchanges; should be periodically reviewed (at least on half-yearly basis); single issuer should not have more than 15 per cent weight in the index and there should be at least 8 issuers in the index.
Besides, the index should not have more than 25 per cent weight in a particular group of issuers (excluding securities issued by PSUs, Public Financial Institutions (PFIs) and Public Sector Banks (PSBs).