RBI publishes draft guidelines for government securities bond forwards

 RBI publishes draft guidelines for government securities bond forwards

RBI publishes draft guidelines for government securities bond forwards

Bond forward transactions are open to both residents and non-residents who meet the requirements of the Foreign Exchange Management (Debt Instruments) Regulations to invest in government securities.

Banks, investors, market players, and other interested parties are encouraged to provide feedback on the proposed directives by January 25, 2024.

With the intention of growing the market for interest rate derivative products, the Reserve Bank of India (RBI) released draft rules on bond forwards in government securities on December 28.

According to recommendations, the central bank should consider introducing bond futures for government securities.

The goal of the draft guidelines on contracts for the early delivery of government securities is to provide market players—especially long-term investors—the ability to better manage their interest rate and cash flow risks.

The RBI stated in a statement that comments on the draft guidelines are welcome from banks, investors, market players, and other interested parties by January 25, 2024.

Bond forward transactions are open to both residents and non-residents who meet the requirements of the Foreign Exchange Management (Debt Instruments) Regulations they should put money in government securities.

Bond forward transactions would be conducted on dated Central Government and State Government securities in accordance with the proposed regulations.

Bond forward transactions by scheduled commercial banks and freestanding primary dealers (SPDs) will be permitted as market-makers. Small financing banks, payment banks, local area banks, and regional rural banks are not included.

The proposed regulations stated that "a market-maker or a central counterparty designated by the Reserve Bank as an approved central counterparty for bond forward transactions has to be at least one of the two parties to a bond forward transaction."

In bond forwards, market makers are free to cover short positions and acquire long holdings. Debt instruments with such holdings in bond forwards may be utilized in repo transactions, according to the draft guidelines, as long as the maturity of the repo does not surpass the maturity of the bond forward.

Users who are not FPIs are permitted to take unlimited long positions in bond forwards, while users who are not resident businesses are permitted to hold covered short positions.

The underlying debt instruments in bond forwards may be employed in this kind of circumstance.

If the user is otherwise qualified to engage in repo transactions, they may do so as long as the maturity of the forward bond is not more than the maturity of the repo.

According to the draft, bond forwards will be exchanged on electronic trading platforms (ETPs) and other over-the-counter (OTC) marketplaces.

Regarding settlement, the draft instructions provide that bond forwards may be handled in cash or in person.

In the case of bond forwards that are physically resolved, the Reserve Bank will authorize any clearing agency for this purpose. Cash settlement may be done bilaterally or via any clearing agency that the Reserve Bank has approved. is feasible.

According to the draft instructions, market participants may transfer their bond forward positions to another qualified market participant through Novation1 or liquidate their positions with the original counterparty, subject to the guidelines in the Circular on Novation of OTC Derivatives Contracts Are.

Within 60 minutes after beginning a transaction, market makers are required to submit all bond forward transactions to the Clearing Corporation of India (CCIL) trading repository.

Market participants shall value and account for bond forwards in accordance with the announced and applicable accounting standards, as well as the regulatory guidelines and directives provided by the relevant authorities.

If any market participant violates any of these Directions' provisions or as any other applicable law, the Reserve Bank may, in addition to taking any appropriate punitive or regulatory action, forbid the market participant from engaging in bond forward transactions for a maximum of one month at a time, after giving the offending party or agency a reasonable opportunity to defend its action. As a result, the Reserve Bank will make the action public, according to the draft guidelines.