The Reserve Bank of India–Securities and Exchange Board of India Standing Technical Committee on Exchange-Traded Interest Rate Futures was formed in February 2008 to propose a functional framework for interest rate futures in India. The committee, constituted with senior officials from the two institutions, was tasked with operationalizing these futures based on a 10-year Government of India coupon-bearing security. Chaired by M. S. Ray, Executive Director, SEBI, members included Nagendra Parakh (CGM, SEBI); Sanjeevan Kapshe (OSD, SEBI); K. V. Rajan (CGM, RBI); Prashant Saran (CGM, RBI); Salim Gangadharan (CGM, RBI); Chandan Sinha (CGM, RBI); H. S. Mohanty (DGM, RBI); and Sujit Prasad (GM, SEBI, Member-Secretary). It identified the need for such futures due to the pervasive interest rate risks that affect not only financial institutions but also corporations and households. The goal was to provide a standardized, transparent, and accessible hedging mechanism to address macroeconomic risks, such as inflation. The committee proposed going through the clearinghouse to institute standardized, transparent futures contracts with reduced counterparty risk, enhancing overall capital efficiency for the benefit of market participants.

The committee recommended a 10-year Government of India security with a 7 percent coupon rate as the underlying asset for the futures contracts. The contract size was set at Rs. 2 lakhs, with a maximum maturity of 12 months and four quarterly contracts. The committee emphasized a robust risk-management framework and introduced an initial margin requirement based on a 99 percent Value-at-Risk model. It set the margin at 2.33 percent of the contract value on the first trading day. The report also recommended position limits to regulate market exposure—6 percent of the total open interest or Rs. 300 crore at the client level, and 15 percent or Rs. 1,000 crore at the trading-member level. The contract was designed for physical settlement through the depositories, with deliverable-grade securities having maturities between 7.5 and 15 years.

The report further detailed stringent risk-management measures, including real-time computation of margins and mark-to-market settlements on a T+1 basis. Portfolio-based margining was proposed using the Standard Portfolio Analysis of Risk methodology, ensuring real-time margin adjustments and updates. The regulatory framework allowed these contracts to be traded on recognized stock exchanges, with specific net worth requirements for trading and clearing members. The committee also recommended extending the use of interest rate futures for hedging risks beyond government-securities portfolios, covering entire bank balance sheets. It called for continuous reviews of risk-containment measures, ensuring that the system adapts to evolving market needs.

The committee’s key recommendations, including the introduction of 10-year coupon-bearing Government of India security futures with physical settlement and expanded hedging for banks’ balance sheet risks, were accepted. However, the suggestion to reintroduce futures based on 91-day Treasury bills was deferred, and the idea of futures based on overnight rates was rejected.

The committee's recommendations enhanced the framework for interest rate futures in India, providing a structured and secure platform for managing interest rate risks while fostering market depth and stability.