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Informist, Monday, Jun. 16, 2025

 

--RBI releases draft norms on rupee interest rate derivatives

--RBI seeks comments on rupee interest rate derivatives draft norms by Jul 7

--RBI: Moot reporting global interest rate derivative trades in draft norms 
--RBI:Interest rate derivative draft norms rationalise reporting requirements

 

NEW DELHI – The Reserve Bank of India Monday issued a draft master direction on rupee interest rate derivatives and sought feedback on it by Jul. 7. The norms will modify directions issued in June 2019 to deal with the emergence of new products and the participation of non-residents in the market, which has necessitated a comprehensive review of the extant norms, the central bank said.

 

The reporting requirements have been changed to reduce the compliance burden. "Separately, a requirement for reporting of IRD (interest rate derivative) transactions undertaken globally is proposed to be introduced with a view to enhancing transparency in the Rupee IRD market," the RBI said in a release.

 

The draft norms continue to differentiate between market-makers and other users. Both residents and non-residents are eligible to participate in interest rate derivative markets, the RBI said. A non-resident can conduct transactions through its central treasury or group entity, and the market-maker will ensure that proper authorisation has been given by the user to such an entity to make trades.

 

Market-makers include scheduled banks, standalone primary dealers, an upper-layer non-banking finance company, or an all-India financial institution. At least one counterparty in a derivative trade must be a market-maker or a central counterparty designated by the RBI, according to the draft norms.

 

The draft norms expand on regulation for exchange-traded derivatives, even as the products available remain widespread. Any recognised stock exchange can offer a standardised derivative product with the RBI's prior approval, as earlier, and prior approval granted does not have to be refreshed. Any exchange-traded interest rate derivative shall use a floating rate of interest, price, or index as a benchmark provided by a financial benchmark administrator authorised by the central bank, as per the draft norms. Non-residents can trade on exchange-traded derivatives to hedge their interest rate exposure.

 

Foreign portfolio investors can buy or sell interest rate futures provided the aggregate long position of all such investors across all instruments does not exceed INR 50.00 billion, as per the draft norms. The total gross short position of any FPI should also not be higher than its consolidated long, or buy, position in government securities and interest rate futures. 

 

Market timings shall be as prescribed by the Securities and Exchange Board of India in consultation with the RBI, according to the draft norms. Exchanges will have to inform users of the potential risks in interest rate derivative products. They will also need to furnish returns, documents, and other information relating to interest rate derivatives trades to the RBI or any other entity directed by the regulator.

 

Users will be classified as retail or non-retail. Non-retail users can be non-banking finance companies, including housing finance companies, an insurer or pension fund regulated by the sectoral regulators, and mutual funds and alternative investment funds regulated by SEBI. Residents with a minimum net worth of INR 5.00 billion or a minimum turnover of INR 10.00 billion or a non-resident who is not an individual can also be classified as non-retail users.

 

Categories of derivatives users will be classified as retail users, according to the draft norms. Non-retail users can request the market-maker to classify them as retail users, and the market-maker can also classify otherwise retail users as non-retail provided they have the risk management capability for the role.

 

Market-makers can offer forward rate agreements and interest rate swaps to retail users without caveats. European interest rate call and put options and interest rate cap and floor can also be provided, given the condition that a retail user buys only that category of products. A retail user may also get access to interest rate collar and reverse interest rate collar, provided they are not a net receiver of premium.

 

Non-retail users get all the products allowed for retail users, as well as interest rate swaption and any other interest rate derivative product excluding leverage derivatives and derivatives with a derivative instrument as the underlying security. Authorised Dealer Category-I banks and standalone primary dealers can offer foreign currency-settled interest rate derivatives to non-residents only, as well as trade among themselves. They can trade derivatives in the Modified Mumbai Interbank Forward Outright Rate only among themselves, as per the draft norms.

 

Market-makers shall offer derivatives to resident retail users and even those non-retail users which have been deemed so by market-makers only for hedging, the draft said. Other resident non-retail users can get these products without restriction. Foreign currency-settled derivatives can be offered to non-resident individuals freely, except for individuals who can only use them to hedge. Market-makers shall offer an interest rate derivative contract on government securities to a non-resident only as a hedge, the RBI said.

 

Derivatives transactions, including those settled in foreign currency between market-makers and non-residents for purposes other than hedging, shall be subject to an overall limit of INR 10.00 billion as Price Value of a Basis Point of all outstanding positions. After the cap is reached, market-makers can only offer derivatives to non-residents for hedging.

 

"CCIL (Clearing Corp. of India Ltd.) shall monitor and publish the utilization of the PVBP limit on a daily basis. CCIL shall also publish the methodology for calculation of the PVBP limit," as per the draft norms.

 

According to the RBI's proposal, a market-maker other than a standalone primary dealer shall report necessary details of all offshore rupee interest rate derivative transactions conducted by offshore related parties to the trade repository of CCIL. The related entity may also choose to report the transaction independently. All rupee derivatives transactions undertaken globally by related parties of domestic market-makers must be reported, the RBI said. 

 

Back-to-back transactions by related parties with other market-makers do not need to be reported, the RBI said. A contract with a gross notional value below $1.00 million or equivalent is also exempted. Within 12 months of the directions coming into effect, the regulator said transactions reported by a market-maker should be 80% of the gross notional value of all interest rate derivative transactions undertaken offshore by offshore related parties, climbing to 90% within 24 months.

 

Reporting should ideally take place the same day, but in all cases within two working days of the transaction date, as per the draft norms. All elements of a covered transaction must be reported to CCIL, providing meaningful information about the deal. "The central counterparty may be reported as the counterparty only in cases where the financial transaction is undertaken on an anonymous trading platform and is cleared by the central counterparty," according to the RBI.

 

Cross-border remittances arising out of derivatives transactions for every month must also be reported to the RBI by the 10th of the following month. All derivatives transactions other than foreign currency deals and structured derivatives must be reported within 30 minutes by market-makers. Foreign currency-settled derivatives with non-residents have to be reported before 1200 IST the following business day. Structured derivatives deals must be reported by the close of CCIL's trade repository the same day.

 

"Market participants shall follow the applicable prudential norms, including those related to capital adequacy, exposure norms, related party transactions, KYC/AML (know-your-customer/anti-money-laundering) requirements, etc., issued by their respective regulators for IRD transactions," the RBI said.  End

 

Reported by Aaryan Khanna

Edited by Rajeev Pai

 

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