A committee set up by India’s financial regulators — the Reserve Bank of India and the Securities and Exchange Board of India — on Wednesday approved the launch of interest rate futures on stock exchanges on benchmark 10-year government bonds in a bid to provide a mechanism to institutions and households to hedge their interest-rate risks.

The RBI-SEBI Standing Technical Committee on interest rate futures said the launch of futures based on 91-day treasury bills may be considered later but ruled out futures based on the overnight rate. It said the notional coupon on the 10-year government security for rate future contracts would be 7 per cent, with a semi-annual compounding.

The trading hours for the contract would be from 9 am to 5 pm from Monday to Friday. The contract size would be Rs two lakh and the contracts would mature within 12 months. There would be four fixed quarterly contracts expiring in March, June, September and December, the report said. The contracts will be traded on the currency derivatives segment of a recognised stock exchange, the RBI-Sebi report said. The contract cycle will consist of four fixed quarterly contracts expiring in March, June, September and December.

The gross open positions of a client across all contracts should not exceed 6 per cent of the total open interest or Rs 300 crore, whichever is higher. For a trading member, the gross open position shouldn't exceed 15 per cent of the total open interest or Rs 1,000 crore, whichever is higher. The contract would be settled by physical delivery of deliverable grade securities using the electronic book entry system of the existing Depositories (NSDL and CDSL) and Public Debt Office (PDO) of the RBI. The delivery of the deliverable grade securities will take place from the first business day of the delivery month till the last business day of the delivery month.