All eligible market participants
of Interest Rate Options in India
As announced in the fourth
bi-monthly Monetary Policy Statement 2016-17, it has been decided to
introduce Interest Rate Options in India.
2. The Reserve Bank of India has
accordingly issued a Notification No. FMRD.DIRD. 11/2016 dated
December 28, 2016 giving details of the directions for the
introduction of Interest Rate Option. Eligible market participants are
permitted to take positions in Interest Rate Options for their own balance
sheet management and for market making purposes. Participants, who are
eligible as market makers are, however, advised to ensure that appropriate
infrastructure and risk management systems are in place.
3. These directions have been
issued under Section 45 W of Chapter III D of the Reserve Bank of India
4. A copy of the Interest Rate
Options (Reserve Bank) Directions, 2016 which is placed on the RBI Website,
5. The directions shall be
effective from January 31, 2017.
Chief General Manager
BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
2ND FLOOR, CENTRAL OFFICE FORT
MUMBAI 400 001
Rate Options (Reserve Bank) Directions, 2016
No. FMRD. DIRD. 11/2016 dated December 28, 2016
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 45U and 45W of the Reserve Bank of India Act, 1934 and of all
the powers enabling it in this behalf, hereby gives the following
1. Short title and commencement
1.1 These directions shall be
referred to as the Interest Rate Options (Reserve Bank) Directions, 2016.
1.2 These directions shall come
into force with effect from January 31, 2017.
2.1 An option is a contract
where the purchaser of the option has the right but not the obligation to
either purchase (call option) or sell (put option) the underlying and the
seller (or writer) of the option is obliged to sell (call option) or
purchase (put option) the same underlying at a price/rate agreed in advance
(known as the strike price/rate) during a certain period of time or on a
specified date (exercise date) in the future.
2.2 Interest Rate Options are
contracts whose value is based on Rupee interest rates or Rupee interest
2.3 An interest rate cap is an
interest rate option in which the buyer of the option receives a pay-off
when the reference rate is above the strike rate on expiry. Analogously, an
interest rate floor is an interest rate option in which the buyer of the
option receives a pay-off when the reference rate is below the strike rate
2.4 Interest Rate Collars are
derivative contracts where a market participant simultaneously purchases an
interest rate cap and sells an interest rate floor on the same reference
rate for the same maturity and notional principal amount. A reverse
interest rate collar is a derivative contract which involves simultaneous
purchase of an interest rate floor and sell of an interest rate cap on the
same reference rate for the same maturity and notional principal amount.
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.
3.1 Interest Rate Options are
permitted on exchanges authorized by SEBI as well as in the
Over-the-Counter (OTC) market.
3.2 Exchanges shall obtain prior
approval of the Reserve Bank before introducing any Interest Rate Option.
4. Types of IROs
Eligible entities can undertake
transaction in simple European call and put options, interest rate caps,
interest rate floors or collars. A European option may be exercised only at
the expiration date of the option i.e., on a single pre-defined date.
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
6.1 Market Makers: Banks and
Primary Dealers (PDs) may act as market makers. Other regulated
institutional entities can participate as market makers subject to the
approval of their respective regulators.
6.2 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
7. Reporting of OTC transactions
7.1 All OTC transactions
executed among market makers shall be reported within 30 minutes of the
trade to the Trade Repository of CCIL.
7.2 All market makers shall
report client trades on the same day by close of business hours to the
Trade Repository of CCIL.
8. Settlement of transactions in
8.1 OTC transactions executed
among market makers shall settle bilaterally or through any clearing
arrangement approved by RBI 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.
8.3 Financial Benchmark India
Pvt. Ltd. (FBIL) shall publish rates / prices for the reference rate /
asset/derivatives as the case may be for arriving at settlement value in
the OTC market.
9. Other Conditions
The Comprehensive Guidelines on
Derivatives issued 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.
Chief General Manager