RBI releases Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019

Jun 27, 2019 | by Avantis RegTech Legal Research Team

The Reserve Bank of India (RBI) on June 26, 2019, has released the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 and shall supersede all other Directions indicated in Annex-I. These Directions shall be applicable to Rupee interest rate derivatives transactions undertaken on recognized stock exchanges and Over-the-Counter (OTC) markets, including on electronic trading platforms (ETPs). These Directions shall come into force with immediate effect. 

Interest Rate Derivatives on Recognized Stock Exchanges -

IRD transactions carried out on exchanges shall be subject to the following directions:

1) Exchanges are permitted to offer any standardized Interest Rate Derivatives product.

2) The product design, eligible participants and other details of the IRD product may be finalized by the exchanges.

3) Exchanges shall obtain prior approval of the Reserve Bank before introducing any new IRD product or before carrying out modifications to an existing product.

Interest Rate Derivatives in the OTC Market -

The IRD transactions in the OTC market shall be subject to the following directions:

(a) Scheduled Banks, Primary Dealers (PDs) and All-India Financial Institutions (AIFIs) are eligible to act as market-makers for IRD products in OTC markets.

(b) Market-makers may offer the following products to retail users 

Forward Rate Agreement (FRA),

• Interest Rate Swap (IRS), and

• European Interest Rate Options (IRO) including caps, floors, collars and reverse collars.

(c) The market-makers may offer swaptions and structured derivative products, excluding leveraged derivatives, only to non-retail users.

(d) The market-makers shall classify a user either as a ‘retail’ user or as a ‘non-retail’ user.

(e) Market-makers shall ensure that transactions undertaken by retail users are for the purpose of hedging an underlying interest rate risk. Resident ‘non-retail’ users can undertake transactions in permitted products for both hedging and otherwise.

(f) A non-resident can undertake transactions in the Rupee interest rate derivatives markets to hedge an exposure to Rupee interest rate risk and, for purposes other than hedging.

(g) Any floating interest rate or price or index used in IRDs in the OTC market 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. FIMMDA shall ensure that the floating rate approved by them is determined transparently, objectively and in arm’s length transactions.

(h) IRD transactions shall be settled bilaterally or through any clearing arrangement approved by the Reserve Bank for the purpose.

(i) Settlement basis and other market conventions for IRD transactions shall be specified by FIMMDA, in consultation with market participants.

[Notification No.FMRD.DIRD.20/2019]

Click here to download the Notification.


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