The Securities and Exchange Board of India has permitted exchanges to launch futures contracts on corporate bond indices rated AA+ and above to enhance liquidity in the bond market. The introduction of futures on corporate bond indexes will help to open up the market by enabling hedging and arbitrage. SEBI has taken steps to regulate retail bond platforms and lower the minimum investment amount for corporate debt investments to expand the market for corporate debt. A future contract enables a buyer or a seller to purchase or dispose of a particular standard underlying asset at a price set in the future. The value of the corporate bond should not be less than Rs. 2Lakhs at the time of introduction, while the tenure will be of three years. It should be settled in cash in rupees. An index of bonds, also known as a bond market index, is comprised of selected bonds that are used to ascertain the performance of the bond market. All working days from Monday to Friday, the trading hours are from 9.00 AM to 5.00 PM. Exchanges must match the CBIF trading hours with those of the underlying market. Infrastructure and risk management systems must be in place at stock exchanges and clearing corporation(s) that correspond to trading hours. SEBI formed a working group including officials from the NSE, BSE, and MSEI. The circular further explains that the stock exchange wishes to offer such contracts should submit a comprehensive proposal for SEBI's approval, including information on the underlying corporate bond index, the index methodology, contract specifications, applicable trading, clearing & settlement mechanism, risk management framework, safeguards to ensure market integrity, investor protection, surveillance systems, etc. The SEBI listed the following requirements: The underlying derivative contract should consist of corporate debt securities; constituents should have adequate liquidity and diversification at the issuer level, as determined by the stock exchanges; should be periodically reviewed (at least on a semi-annual basis); single issuer should not have more than 15% weight in the index; and there should be at least 8 issuers in the index. Additionally, securities issued shall not account for more than 25% of the weight of the index. Thank you.
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