On 21-2-2025, the Reserve Bank of India (‘RBI’) notified the Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025 applicable to forward contracts in government securities undertaken in the Over-the-Counter market in India. The provisions will come into force on 2-5-2025.
Key Points:
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Eligible Market Participants eligible to undertake bond forward transactions:
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A resident;
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A non-resident who is eligible to invest in Government Securities under the Foreign Exchange Management (Debt Instruments) Regulations, 2019.
Market makers:
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The following entities will be eligible to undertake transactions in bond forwards as Market-makers:
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Scheduled Commercial Bank (except a Small Finance Bank, a Payment Bank, a Local Area Bank and a Regional Rural Bank);
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Standalone Primary Dealer.
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Market maker can undertake long positions without any limit and covered short positions in bond forwards.
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Market makers will also be eligible to undertake uncovered short positions subject to the underlying government security being eligible for short sale.
Such uncovered short sales have to be covered within a period of 3 months from the date of transaction.
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One of the parties to bond forward has to be a market- maker or a central counter party who is authorized by RBI.
Users:
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Entity intending to be a user has to be eligible to be classified as a non-retailer user according to Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019, dated June 26, 2019
NOTE: “Non-retail users shall include
(a) entities regulated by the Reserve Bank;
(b) insurance companies;
(c) mutual funds, pensions funds and other collective investment vehicles;
(d) All India Financial Institutions (AIFIs), viz., Exim Bank, NABARD, NHB and Small Industries Development Bank of India (SIDBI);
(e) companies/entities with net-worth of RS. 500 crore or above; and
(f) non-residents other than individuals.”.
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Directions for Users who are eligible:
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Can undertake long positions in bond forwards without any limit;
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Can undertake covered short positions in bond forwards only for the purpose of hedging;
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To ensure that short positions undertaken by a user is covered, market-makers can call for any relevant information/documents from the user, who, in turn, shall be obliged to provide such information/document;
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User with a covered short position in a bond forward will have to exit its short position in case it ceases to hold the underlying government security.
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Settlement and Unwinding of a bond forward transaction:
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Can be physically settled or cash settled;
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Can be settled through the Clearing Corporation of India Ltd. (‘CCIL’) Or any other clearing agency or clearing arrangement;
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Can be settled bilaterally.
Reporting to CCIL by the Market Makers:
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They will have to report all bond forward transactions undertaken during the day to the Trade Repository (‘TR’) of CCIL before the closure of the TR of the day.
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The reporting should contain:
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details of the counterparties;
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underlying government security;
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settlement type;
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whether a short position is a covered or uncovered short position.
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They will have to report instances of unwinding, novation, bilateral settlement and settlement default to the TR.
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They will have to ensure that the outstanding balances between their books and the TR should be reconciled and subjected to concurrent audit on an ongoing basis.
Prudential Norms, Accounting and Capital Requirements:
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Market participants will have to follow all applicable prudential norms including those related to capital adequacy, exposure norms, related party transactions;
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Market maker has to introduce appropriate and robust methodologies for marking to market its position in bond forwards.
Violation of Directions: RBI can disallow the violator, person or agency, from dealing in bond forwards for a period not exceeding 1 month at a time.