RBI proposes to launch exchange-traded, OTC interest rate derivatives
The Reserve Bank of India on Tuesday proposed to introduce exchange-traded and over the counter interest rate derivatives products that would be accessible to both foreign investors and retail participants.
However, retail participants can only use the product for hedging, while non-retail participants can use the product 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 , Interest Rate Swap , European Interest Rate Options including caps, floors, collars and reverse collars, while non-retail traders can also take exposure in swaptions and structured derivative products, excluding leveraged derivatives and derivatives on derivatives.
At present, 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 would be allowed to transact in permitted exchange-traded interest rate derivatives for a collective Rs 5,000 crore in net long positions.
The exchanges will be allowed to come up with their own product design, eligible participants and other details of the IRD.
The products should be benchmarked to any floating interest rate benchmark published by the Financial Benchmark Administrator 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 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 Ltd. , clearly indicating whether the trade is for hedging or other purposes.