RBI proposes to launch exchange-traded, OTC interest rate derivatives

Products to be accessible to foreign investors and retail participants too, but latter can only use for hedging

The Reserve Bank of India (RBI) on Tuesday proposed to introduce exchange-traded and over-the-counter (OTC) interest rate derivatives products that would be accessible to both foreign investors and retail participants.  Retail participants can, however, only use the product for hedging, while non-retail participants can use it for any purpose.   

In a draft guideline released on its website, the central bank said retail participants can be allowed to trade on Forward Rate Agreement (FRA), Interest Rate Swap (IRS), and European Interest Rate Options (IRO), including caps, floors, collars and reverse collars, while non-retail traders can take exposure in swaptions and structured derivative products, excluding leveraged derivatives and derivatives on derivatives. 

Presently, only interest rate futures and interest rate options are allowed on government securities. With the introduction of many more IRF products, corporate debt could also be incorporated for making derivatives over time, say experts.   Foreign Portfolio Investors (FPIs) would be allowed to transact in permitted exchange-traded interest rate derivatives (IRD) for a collective Rs 5,000 crore in net long positions.  Additionally, “the net short position of an FPI on exchange-traded IRDs shall not exceed its long position in government securities and other rupee debt securities,” the RBI said. 

Such IRD transactions can be carried out on exchanges as standardised products. The exchanges will be allowed to come up with their own product design, eligible participants, and other details of the IRD.  In the OTC markets, banks and primary dealers would act as market makers. Foreign counterparts of market-makers in India may offer rupee IRD transactions to non-residents but such transactions have to be undertaken directly with a market-maker in India, or by way of a ‘back-to-back’ arrangement through a foreign counterpart of the market-maker in India.   “Every rupee interest rate derivatives transaction undertaken offshore by any related entity of a market-maker in India, shall be accounted for individually in the books of the market-maker in India,” the RBI said.  

Resident Indian companies with a minimum net worth of Rs 500 crore will be eligible to trade in these products. 

The products should be benchmarked to any floating interest rate benchmark published by the Financial Benchmark Adminis­trator (FBA) or price or index used in IRDs in OTC markets shall be a benchmark published by an FBA or approved by The Fixed Income Money Market and Derivatives Association of India (FIMMDA) for this purpose.  

The IRD transactions will be settled bilaterally or through any clearing arrangement approved by the Reserve Bank for the purpose, and any transactions will have to be reported back within 30 minutes to the trade repository of Clearing Corporation of India (CCIL), clearly indicating whether the trade is for hedging or other purposes.