Irdai lets insurers to undertake transactions in bond forwards for hedging

The Reserve Bank has recently issued directions specifying that any entity, eligible to be classified as a non-retail user shall be eligible to undertake transactions in Bond Forwards

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Regulator Irdai on Monday permitted insurance companies to undertake transactions in bond forwards as users for hedging interest rate risks.

The Reserve Bank has recently issued directions specifying that any entity, eligible to be classified as a non-retail user shall be eligible to undertake transactions in Forward Contracts in Government Securities (Bond Forwards) as a user. 

In a circular on 'Exposure to Forward Contracts in Government Securities (Bond Forwards)', Insurance Regulatory and Development Authority of India (Irdai) said that in view of the RBI's directions and considering insurers requests for introduction of Bond Forwards, "insurers are hereby permitted ...to undertake transactions in Bond Forwards as users for hedging purpose".

The Irdai has also imposed certain conditions.

Insurers should undertake only long positions in Bond Forwards (buying Bond Forwards) and report such transactions on quarterly basis.

Also, Bond Forwards are not permitted for ULIP business, Irdai added.

As per the extant norms, insurers are allowed as users with three types of Rupee Interest Rate Derives to hedge the interest rate risk.

These are: Forward Rate Agreements (FRAs); Interest Rate Swaps (IRS) and Exchange Traded Interest Rate Futures (IRF).