All participants in rupee
interest rate derivative markets
Participation in Rupee Interest Rate Derivatives Markets (Reserve Bank)
Please refer to the Bi-monthly Monetary Policy Statement in April 2018 wherein
it was announced that non-residents shall be given access to the Rupee
Interest Rate Derivative (IRD) market in India.
2. The draft directions were
released for public comments on December 05,
2018. Based on the feedback received from market participants, the
Non-resident Participation in Rupee Interest Rate Derivatives Markets
(Reserve Bank) Directions, 2019 have since been finalized. The Directions
are enclosed herewith.
3. These Directions have been
issued by RBI in exercise of the powers conferred under section 45W of the
Reserve Bank of India Act, 1934 and of all the powers enabling it in this
Chief General Manager
BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
CENTRAL OFFICE, FORT
MUMBAI 400 001
No. FMRD.DIRD.14/2019 dated March 27, 2019
Participation in Rupee Interest Rate Derivatives Markets (Reserve Bank)
The Reserve Bank of India
(hereinafter called “the Reserve Bank”) 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, (herein after called ‘the Act’) read with
section 45U of the Act and of all the powers enabling it in this behalf, hereby
issues the following Directions to all entities including the
non-residents, eligible to participate or transact in interest rate
derivatives in India.
1. Short title and commencement
of the Directions
(1) These Directions shall be
called the ‘Non-resident Participation in Rupee Interest Rate Derivatives
Markets (Reserve Bank) Directions, 2019’.
(2) These Directions shall be
applicable to Rupee interest rate derivative transactions in India,
undertaken on recognized stock exchanges, electronic trading platforms
(ETP) and Over-the-Counter (OTC) markets to the extent stated herein.
(3) These Directions shall come
into force with immediate effect.
For the purpose of these
directions, unless the context otherwise requires,
Hedging is the activity of undertaking a derivative
transaction to reduce an identifiable and measurable risk. For the purpose
of these directions, the relevant risk is Rupee interest rate risk.
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 regular occasions
during a specified period.
A market-maker is
an entity regulated by the Reserve Bank that provides bid and offer prices
entities are entities as defined
under Para-9 of International Accounting Standards -24 (IAS-24).
Non-resident is a person resident outside India as defined in
section 2 (w) of Foreign Exchange Management Act, 1999 (42 of 1999).
Indexed Swap (OIS) is an interest rate
swap based on the Overnight Mumbai Interbank Outright Rate (MIBOR)
benchmark published by Financial Benchmarks India Pvt. Ltd (FBIL).
stock exchanges have the meaning assigned
under Section 2 (f) of the Securities Contract Regulation Act, 1956.
Users refer to all non-resident participants in Rupee interest
rate derivative markets.
3. A non-resident can undertake transactions in the
Rupee interest rate derivatives markets for the following purposes:
hedge an exposure to Rupee interest rate risk as stipulated in para 4; and,
purposes other than hedging, to the extent stipulated in para 5.
4. Transactions for the purpose
of hedging interest rate risk
non-resident may undertake Rupee interest rate derivatives in India to
hedge its interest rate risk using any permitted interest rate derivative
product transacted on recognized stock exchanges, ETPs or OTC markets.
non-resident shall ensure that its interest rate derivative transactions
conform to the provisions of Section 45(V) of the RBI Act, 1934, as well as
applicable provisions of Foreign Exchange Management Act, 1999 and the
rules, regulations and directions issued thereunder.
shall ensure that transactions by a non-resident are being carried out for
the purpose of hedging. For this purpose, market-makers may call for any
relevant information from the non-resident, who, in turn, is obliged to
provide such information.
5. Transactions for purposes
other than hedging interest rate risk
i. Non-residents, other than
individuals, may undertake Overnight Indexed Swaps (OIS) transactions for
purposes other than hedging interest rate risk in terms of the following
(a) These transactions may be
undertaken directly with a market-maker in India, or by way of a
‘back-to-back’ arrangement through a foreign branch/parent/group entity
(foreign counterpart) of the market- maker.
Explanation – For the purpose of
these directions, a ‘back-to-back’ arrangement means that the non-resident
undertakes the transaction with a foreign counterpart of the market-maker
and the foreign counterpart, in turn, immediately enters into an off-setting
transaction with the market-maker in India.
(b) A market-maker shall enter
into a ‘back-to-back’ arrangement referred to in (a) above provided that:
rupee interest rate derivatives transactions, globally, of related entities
of the market-maker are accounted for in the books of the market-maker. In
other words, no related entity of the market-maker shall undertake
transactions in Rupee interest rate derivatives other than under the
interest rate derivatives transactions of FPIs related to the market-maker
covered under para 4 above shall be exempted from the requirement in para
(c) OIS transactions by
non-residents for purposes other than hedging interest rate risk shall be
subject to an overall limit, as specified below :
Price Value of a Basis Point (PVBP) of all outstanding OIS positions
undertaken by all non-residents shall not exceed the amount of INR 3.50
billion (PVBP cap).
Explanation – PVBP cap shall be calculated by making a gross addition,
ignoring mathematical signs, of the PVBP of each non-resident.
shall not undertake any further OIS transactions for purposes other than
hedging after the PVBP cap is reached.
PVBP of all outstanding OIS positions for any non-resident (including
related entities) shall not exceed 10% of the PVBP cap.
Corporation of India Ltd. (CCIL) shall publish the methodology for
calculation of the PVBP and monitor as well as publish utilization of the
PVBP limit on a daily basis.
ii. Foreign Portfolio Investors
(FPIs), collectively, may also transact in interest rate futures (IRF) up
to a limit of net long position of INR 50 billion in terms of RBI circular No. FMRD.DIRD.6/14.03.001/2017-18 dated
March 01, 2018.
All payments related to interest
rate derivative transactions of a non-resident may be routed through a
Rupee account of the non-resident or, where the non-resident doesn’t have a
Rupee account in India, through a vostro account maintained with an
Authorised Dealer bank in India. The market-maker shall maintain complete
details of such transactions.
7. KYC for the non-resident
Market-maker shall ensure that
non-resident clients are from an FATF compliant country. Market-makers
shall also ensure that non-resident clients comply with the KYC
requirements as prescribed under Master
Direction – Know your Customer Direction, 2016
(DBR.AML.BC.No.81/14.01.001/2015-16) dated February 25, 2016 as
amended from time to time.
OTC rupee interest rate derivative transactions shall be reported by
market-makers and ETPs to the trade repository of CCIL, clearly indicating
whether the trade is for hedging or other purposes.
shall report trade details, including particulars of the non–resident
client for OIS transactions under the ‘back-to-back’ arrangement, to the
trade repository of CCIL.
remittances arising out of transactions in Rupee interest rate derivatives
shall be reported by banks to the Reserve Bank at monthly interval in the
prescribed format as furnished in Annex.
Cross-border remittances arising
out of Rupee interest rate derivatives transactions undertaken by
non-residents during MM/YY (month of year):
For purposes other than