Interest Rate Derivatives Market: Peculiarities, Problems and Prospects for Russia

Interest rate risk is the main market risk with regard to fixed income instruments on the capital market. Interest rate risk is inherently non-diversifiable. It requires the use of specific methods and financial management tools. Hedging remains the primary mechanism by which market participants manage interest rate risk on capital market. This study highlights the critical features of the derivatives application for hedging interest rate risk on the capital market. The authors explain that when forming long-term interest rate futures as the main exchange derivatives, it is crucially important to consider the features of the local market for underlying assets, including the volume and number of bond issues; the number of bonds used as underlying assets for futures contracts; trading volume and liquidity characteristics of the secondary bond market. Based on the analysis of the development of long-term interest rate futures and studying the structure and specification of derivatives traded at the biggest exchanges the authors highlight features of basic groups of current long-term interest rate futures, classify experience of the launch of these derivatives, postulating that the structure of the futures contract must correspond to the peculiarities of the local market of underlying assets. The authors critically examine the experience of forming the interest rate derivatives market in Russia. They find that the lack of demand for interest rate derivatives traded on the Moscow Exchange from 2011 to 2022 was caused by problems when designing these agreements, particularly by the fact that the specialists who develop them did not fully take into account the specific features of the Russian government bond market.