RBI Approves Forward Contracts for Government Securities
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Synopsis
The Reserve Bank of India has announced the introduction of forward contracts in Government securities, aiming to enhance market development and assist long-term investors in managing interest rate risks.
Key Takeaways
- RBI to introduce forward contracts in government securities.
- Long-term investors can better manage interest rate risk.
- Draft guidelines were released in December 2023.
- Public feedback on guidelines was invited until January 25, 2024.
- Access to NDS-OM expanded to non-bank brokers.
Mumbai, Feb 7 (NationPress) The Governor of the Reserve Bank announced on Friday that the RBI will soon implement forward contracts in Government securities, with detailed guidelines to be released shortly.
“We have been receiving valuable feedback regarding the necessity of enabling forward contracts in Government securities to foster market growth. These forward contracts will assist long-term investors, like insurance funds, in managing their interest rate risks throughout varying interest rate cycles. Furthermore, they will facilitate precise pricing of derivatives that utilize bonds as their underlying assets,” the RBI Governor stated.
In recent years, the Reserve Bank has broadened the range of interest rate derivative products available to market participants for managing their interest rate risks. Besides Interest Rate Swaps, products including Interest Rate Options, Interest Rate Futures, Interest Rate Swaptions, and Forward Rate Agreements are now accessible to market participants.
Draft guidelines on this matter were initially shared in December 2023. The final regulations, reflecting public feedback, will be announced soon, Malhotra indicated.
The Reserve Bank of India (RBI) issued draft guidelines on December 28 regarding bond forwards in government securities aimed at enhancing the range of interest rate derivative products in the market.
The draft guidelines concerning contracts for the delivery of government securities on a forward basis are intended to help market participants, particularly long-term investors, manage their cash flows and interest rate risks effectively.
Feedback on the draft guidelines was solicited from banks, market participants, investors, and other interested parties by January 25, 2024.
Malhotra also revealed that the RBI has decided to permit SEBI-registered non-bank brokers to access NDS-OM on behalf of their clients.
He mentioned that the necessary instructions for executing this decision would be issued separately.
The Negotiated Dealing System – Order Matching (NDS-OM) serves as an electronic trading platform for secondary market transactions in government securities. Currently, access to NDS-OM is granted to regulated entities as well as to the clients of banks and independent primary dealers.
