India regulator approves future contracts on corporate indices

• India regulator has decided to allow derivative contracts on indices graded AA+ and above.
• Exchange operators are first allowed to introduce futures contracts on corporate bond indices.
• SEBI has pushed to regulate retail bond platforms for corporate debt investments.

To increase liquidity in the bond market, India market regulator announced on Tuesday that it has decided to allow stock exchanges to issue derivative contracts on indices of corporate debt instruments graded AA+ and above.

According to a statement released by the Securities and Exchange Board of India (SEBI), the exchanges are first allowed to introduce futures contracts on corporate bond indices.

By enabling hedging and arbitrage, the introduction of futures on corporate bond indices could be a step toward expanding the market. Although there is a thriving derivatives market for commodities and stocks, there is none for corporate bonds.

In recent months, SEBI has pushed to regulate retail bond platforms and lower the minimum investment size for corporate debt investments as part of its efforts to expand the corporate debt markets.

The regulator SEBI stated that stock exchanges interested in implementing such contracts should submit a comprehensive proposal for approval and that the exchanges should also put in place the appropriate systems and revise the relevant bye-laws, rules, and regulations.

According to SEBI, the index’s constituents will be reviewed on a regular basis and should have sufficient liquidity and diversification at the issuer level.

It further stipulated that there should be at least eight issuers in the index and that no one issuer or group of issuers shall account for more than 15% or 25% of the index’s weight.

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