In the exercise of powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) to protect the interests of investors in securities and promote the development of, and to regulate the securities market, the SEBI had constituted a working group of representatives of National Stock Exchange, Bombay Stock Exchange, and Metropolitan Stock Exchange of India Limited to make recommendations on derivatives on bond indices. Basis the submissions made subsequently and recommendations received, SEBI has, vide Circular No.: SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/11 dated January 10, 2023 (read here), permitted to introduce derivative contracts on indices of corporate debt securities rated AA+ and above.

As the initial step towards implementation of this, SEBI has permitted to launch the future contracts on corporate bond indices, details regarding which have been enlisted in Annexure A of the circular. Future contracts enables a buyer to buy and a seller to sell a certain underlying asset at a price which is determined in the future. Any stock exchange desirous of introducing future contracts is required to submit a detailed proposal to SEBI for its approval, enlisting details related to 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.

Annexure A provides for the framework for Cash Settled Corporate Bond Index Futures (CBIF). The index underlying the derivative contract shall be composed of corporate debt securities and have adequate liquidity and diversification at the issuer level for the purpose of determining exposure limits, as may be determined by the stock exchanges. Further, there shall be at least 8 issuers in the index, and the bar of 25% weight in a particular group of issuers shall not be exceeded. However, securities issued by Public Sector Undertakings, Public Financial Institutions and Public Sector Banks are exempted from this bar. The constituents of the index shall be reviewed periodically on bi-annual basis. Additionally, the value of the CBIF shall be more than Rs. 2,00,000/- at the time of introduction, which shall be reviewed by the stock exchanges on bi-annual basis and may make revisions as it may deem fit.

This update has been contributed by Jitendra Soni (Partner) and Esha Dinesh (Associate)

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