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Banking industry

Indian Banks Increase Participation in Derivatives Trading, Led by Public Sector Banks

Strategic Insights

— 2 min read

The Reserve Bank of India has long encouraged banks to use India's domestic derivatives infrastructure to manage interest rate risk from government bond positions. In 2015, the Clearing Corporation of India established a derivatives trading platform, which has played a crucial role in bringing public sector banks into the trading fold. The push towards more efficient management of interest rate risk has also contributed to this shift. The data shows a significant increase in the participation of nationalized banks in the derivatives market.

Key Takeaways:

  • Nationalized banks accounted for 0.2% of the market share in February 2015, but rose to 7.6% of overall trades in MIBOR IRS in March 2023, CCIL data showed.
  • The notional amount of state-owned banks in IRS trades increased to ₹1.2 lakh crore in March 2023, a hundred times higher than ₹875 crore in February 2015.
  • The MIBOR IRS, which includes Overnight Indexed Swaps (OIS), has become one of the most liquid interest rate derivatives markets in India.
  • OIS is the primary tool for hedging interest rate risk, and Indian banks hold large amounts of government bonds, necessitating the management of interest rate risk.
  • The CCIL's ASTROID platform has played a significant role in bringing more players to the derivatives market by providing a guarantee and anonymous trading facility.
  • Naveen Singh, head of trading at ICICI Securities Primary Dealership, stated that ASTROID has improved price discovery and given traders confidence through its anonymous platform.
  • Treasury executives from PSU banks have identified a profitable arbitrage opportunity between government bond yields and OIS rates as a driving force behind trading interest.
  • The five-year government bond yield is currently near 7%, while the five-year OIS is 100 basis points lower, providing a 'carry' benefit.
  • Foreign banks continue to dominate derivatives trading, with a market share of 57.1% in March 2023, down from 75.9% in February 2015, excluding US banks.
  • Nitin Agarwal, head of trading at ANZ, attributed the decline to the liberalization of OIS in early 2019, which allowed banks to provide OIS to non-Indian counterparties.

Statistics:

  • Nationalized banks' market share in the MIBOR IRS increased from 0.2% in February 2015 to 7.6% in March 2023.
  • The notional amount of state-owned banks in IRS trades increased from ₹875 crore to ₹1.2 lakh crore between February 2015 and March 2023.
  • The five-year government bond yield is near 7%, while the five-year OIS is 100 basis points lower.
  • Foreign banks' market share in the MIBOR IRS decreased from 75.9% in February 2015 to 57.1% in March 2023, excluding US banks.

Sources:

  • CCIL data, March 2023
  • Reserve Bank of India, 1999
  • Clearing Corporation of India, 2015
  • Naveen Singh, head of trading at ICICI Securities Primary Dealership, 2023
  • Treasury executives from PSU banks, 2023
  • Nitin Agarwal, head of trading at ANZ, 2023

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