The capital markets regulator Securities and Exchange Board of India (Sebi) has allowed stock exchanges to introduce index derivatives contracts based on corporate debt securities rated AA+ and above, reported Business Standard.
Sebi’s decision is likely to enhance liquidity in the bond market. It will also give investors an opportunity to hedge their positions.
“To start with, the stock exchanges are permitted to launch futures contracts on corporate bond indices,” said Sebi, in a circular.
The stock exchanges will have to submit a detailed proposal to the regulator for approval. They will have to provide details related to underlying index, methodology, contract specifications, risk management, and trading, clearing and settlement mechanism.
Constituents of such an index will need to be corporate bond securities with adequate liquidity and diversification at the issuer level. There will also be a review of the constituents every six months.
The index will need to have at least eight issuers, in which a single issuer will not have more than 15 per cent weight.
Furthermore, exchanges will not be allowed to have more than 25 per cent weight in a particular group of issuers in the index or from a particular sector.
However, public sector undertakings (PSUs), public financial institutions, and PSU banks are excluded from this threshold.