Why in the news?

  • RBI and SEBI are carrying out talks to encourage trading in corporate bond index derivatives in order to deepen the debt market.

Corporate Bond Index Derivatives

  • What is it?:
    • Corporate Bond Index Derivatives are exchange-traded derivative instruments whose underlying asset is a corporate bond index.
    • Introduced in India by SEBI in 2023–24 to deepen the corporate bond market and provide hedging & investment tools.
    • Traded on stock exchanges (NSE, BSE), they function similarly to equity index derivatives (like Nifty futures & options) but track a basket of corporate bonds.
  • Significance:
    • Risk Management / Hedging: Investors in corporate bonds (like mutual funds, insurers, pension funds) can hedge interest rate and credit spread risks.
    • Liquidity: Enhances secondary market activity in corporate bonds (traditionally illiquid in India).
    • Price Discovery: Futures on bond indices improve transparency & benchmark pricing.
    • Portfolio Diversification: Provides an additional asset class for institutional and retail investors.
    • Market Development: Supports India’s goal of developing a deep & vibrant corporate bond market in line with GIFT-IFSC and global best practices.
  • Challenges:
    • Low liquidity in underlying corporate bonds may restrict derivative adoption.
    • Market awareness & participation: Needs wider institutional participation.
    • Complexity: Requires understanding of bond pricing, yields, and spreads.

CBID Futures:

  • What is it?: Exchange-traded derivative contracts where the underlying asset is a corporate bond index.
  • Features:
    • They allow investors to buy or sell the index at a pre-determined price on a future date.
    • They are Cash settled– no physical delivery of bonds.
    • Enhances corporate bond market depth
    • Example: NSE Corporate Bond Index Futures, benchmarked against the Nifty AAA Corporate Bond Index.