RBI/2017-18/198
FMRD.DIRD.9 /14.01.020/2017-18
June
14, 2018
To
All Eligible market participants
Dear Sir/Madam,
Interest
Rate Options in India
Please refer to FMRD circular FMRD.DIRD.12/14.01.011/2016-17 dated
December 29, 2016 on introduction of Interest Rate Options in
India. As announced in the first bi-monthly
Monetary Policy Statement 2018-19 dated April 05, 2018, it has now
been decided to permit Interest Rate Swaptions in Rupees so as to enable
better timing flexibility for the market participants seeking to hedge
their interest rate risk.
2. The Reserve Bank of India has
accordingly issued a Notification
No.FMRD.DIRD.8/2018 dated June 14, 2018 enabling the
introduction of swaptions.
3. These directions have been
issued under Section 45 W of Chapter III D of the Reserve Bank of India
Act, 1934.
4. A copy of the Interest Rate
Options (Reserve Bank) Directions, 2018 which is placed on the RBI Website,
is enclosed. This will supersede the Interest Rate Options (Reserve Bank)
Directions, 2016 dated December 28, 2016.
5. These directions shall come
into force with effect from June 15, 2018.
Yours
faithfully,
(T.
Rabi Sankar)
Chief General Manager
RESERVE
BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
1ST FLOOR, CENTRAL OFFICE, FORT
MUMBAI 400 001
Notification
No. FMRD.DIRD.8/2018 dated June 14, 2018
Interest
Rate Options (Reserve Bank) Directions, 2018
The Reserve Bank of India,
having considered it necessary in public interest and to regulate the
financial system of the country to its advantage, in exercise of the powers
conferred by section 45W of the Reserve Bank of India Act, 1934 and of all
the powers enabling it in this behalf and in supersession of the directions
issued, vide Notification No.FMRD.DIRD.11/2016 dated December 28, 2016,
hereby issues the following directions.
1. Short title, commencement and
applicability of directions:
1.1 These directions shall be
called the Interest Rate Options (Reserve Bank) Directions, 2018 and
replace the directions issued under Notification No. FMRD.DIRD.11/2016
dated December 28, 2016. Transactions, if any, undertaken in terms of the
directions issued under the Notification dated December 28, 2016 referred
above shall continue to remain valid and not be affected by any provision
in these directions.
1.2 These directions shall come
into force with effect from June 15, 2018.
1.3 These directions shall be
applicable to exchange traded Interest Rate Options and Over-the-Counter
(OTC) Interest Rate Options to the extent stated herein. In case of
exchange traded Interest Rate Options, procedure for execution and
settlement of trade shall be in accordance with the rules and regulations
prescribed by the stock exchange concerned.
2. Definitions
For the purpose of these
directions:-
2.1 (i) An interest rate option
is a financial derivative contract whose value is based on Rupee interest
rates.
(ii) An interest rate call option
is an interest rate derivative in which the holder (or buyer) has the right
but not the obligation to receive an interest payment based on a variable
interest rate, and simultaneously pay an interest payment based on a fixed
interest rate.
(iii) An interest rate put
option is an interest rate derivative in which the holder (or buyer) has
the right but not the obligation to pay an interest payment based on a
variable interest rate, and simultaneously receive an interest payment
based on a fixed interest rate.
(iv) An option which could be
exercised by the buyer on the expiration date is called a European option.
(v) An interest rate cap is a
series of interest rate call options (called caplets) in which the buyer of
the option receives a payment at the end of each period when the underlying
interest rate is above a rate agreed in advance (strike rate).
(vi) An interest rate floor is a
series of interest rate put options in which the buyer of the option
receives a payment at the end of each period when the underlying interest
rate is below the strike rate.
(vii) An interest rate collar is
a derivative contract where a market participant simultaneously purchases
an interest rate cap and sells an interest rate floor on the same interest
rate for the same maturity and notional principal amount.
(viii) A reverse interest rate
collar is a derivative contract which involves simultaneous purchase of an
interest rate floor and sale of an interest rate cap on the same interest
rate for the same maturity and notional principal amount.
(ix) An interest rate swap is a
financial contract between two parties exchanging or swapping a stream of
interest payments for a `notional principal’ amount on multiple occasions
during a specified period. Such contracts generally involve exchange of
`fixed to floating’ or `floating to floating’ rates of interest.
(x) Interest rate swaptions are
options on interest rate swaps. A swaption gives the buyer the right, but
not the obligation, to enter into an interest rate swap.
2.2 Recognized stock exchanges
shall have the meaning assigned under Section 4 of the Securities Contract
Regulation Act, 1956.
2.3 A market-maker provides bid
and offer prices to users and other market-makers. A market-maker need not
have an underlying risk.
2.4 A user participates in the
derivatives market to manage an underlying risk.
2.5 The words and expressions
used, but not defined in these directions, shall have the meaning assigned
to them in the Reserve Bank of India Act, 1934, or in any other Master
Circular/Notification/Direction issued by the Reserve Bank.
3. Permissible Venues
3.1 Contracts in Interest Rate
Options permitted under Paragraph 4 of these directions, may be entered
into Over the Counter (OTC) or on a recognized stock exchange in India.
3.2 Introduction of a contract
in an Interest Rate Option on a recognized stock exchange shall be subject
to obtaining prior approval of the Reserve Bank by the exchange.
4. Products permitted
An entity eligible under these
directions (as specified under Paragraph 6 below) may transact in the
following European Interest Rate Options:
4.1 Interest Rate Call and Put
Options
4.2 Interest Rate Caps
4.3 Interest Rate Floors
4.4 Interest Rate Collars or
Reverse Collars
4.5 Interest Rate Swaptions
5. Underlying
For orderly market development,
Fixed Income Money Market and Derivatives Association of India (FIMMDA), in
consultation with market participants, shall publish a list of objective
and transparent Rupee money or debt market rates or instruments that may be
used as underlying for Interest Rate Option contracts in the OTC market and
recognized stock exchanges.
6. Eligible Entities
6.1 Participation in the OTC
market for Interest Rate Options shall be limited to (a) Users and (b)
Market Makers.
6.2 Market Makers: The following
entities may offer Interest Rate Options in the OTC market as market
makers:-
(i) Banks, subject to meeting
the following criteria: - (a) net worth of not less than ? 500 crore, and
(b) CRAR of not less than 9%.
(ii) Standalone Primary Dealers.
(iii) Other regulated
institutional entities subject to the prior approval of their respective
regulators.
Explanation:
(a) ‘Net worth’ would have the
meaning as defined in para no. 2.3.3 of DBR
Master Circular no.Dir.BC.12/13.03.00/2015-16 dated July 01, 2015 on
Exposure Norms, as updated from time to time.
(b) ‘Capital to Risk-weighted
Asset Ratio (CRAR)’ would have the meaning as defined in DBR Master Circular no. BP.BC.1/21.06.201/2015-16 dated
July 01, 2015on Basel III Capital Regulations, as updated from time
to time.
6.3 Users: All entities with
underlying interest rate risk may participate as ‘users’ i.e., they may
enter into Interest Rate Option contracts for hedging underlying risk.
‘Users’ shall not be permitted to run net short position in Interest Rate
Options.
6.4 Directions in paragraphs 6.2
and 6.3 above are not applicable to exchange traded Interest Rate Options
as they are governed by rules and regulations of recognized stock
exchanges.
7. Reporting of OTC transactions
A market maker shall report all
OTC transactions in Interest Rate Options, within 30 minutes of entering
into the transaction, to the Trade Repository of Clearing Corporation of
India Ltd. (CCIL).
8. Settlement of transactions in
OTC
8.1 OTC transactions executed
among market makers shall be settled bilaterally or through any clearing arrangement
approved by the Reserve Bank for the purpose.
8.2 Settlement basis and other
market conventions for OTC transactions in Interest Rate Options will be
specified by FIMMDA, in consultation with market participants.
9. Other Conditions
The Comprehensive Guidelines on
Derivatives issued by the Reserve Bank, vide circular
DBOD No.BP.BC.86/21.04.157/2006-07 dated April 20, 2007, as updated
from time to time, including the requirement for a Board approved
‘Suitability and Appropriateness Policy’ shall be complied with, mutatis
mutandis, by all market makers.
(T.
Rabi Sankar)
Chief General Manager
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