‘RBI issues draft Rupee interest rate derivatives’
22nd Sep, 2020
The Reserve Bank of India proposed allowing foreign portfolio investors (FPIs) to undertake exchange-traded rupee interest rate derivatives transactions subject to an overall ceiling of Rs 5,000 crore.
What are Interest Rate Derivatives?
- Interest Rate Derivatives (IRD) are contracts whose value is derived from one or more interest rates, prices of interest-rate instruments, or interest rate indices.
- These may include interest rate futures, options, swaps, swaptions, and FRA's.
- Entities with interest rate risk can use these derivatives to hedge or minimize potential losses that may accompany a change in interest rates.
- The proposed Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2020 are aimed at-
- encouraging higher non-resident participation
- enhance the role of domestic market makers in the offshore market
- improve transparency
- achieve better regulatory oversight
Where FPIs will be allowed?
- FPIsmay transact in permitted exchange-traded IRDs subject to the conditions that, at any point in time "the net long position of FPIs, collectively, and across all exchanges, in exchange-traded IRDs shall not exceed Rs 5,000 crore".
- Also, the net short position of an FPI on exchange-traded IRDs should not exceed its long position in government securities and other rupee debt securities.
- For the purpose of offering Rupee IRD contracts to a user, the market-maker (entities which provide bid and offer prices to users in order to provide liquidity to the market) should classify the user either as a retail user or as a non-retail user.
- Non-retail users are entities regulated by RBI, SEBI, IRDAIor PFRDA; resident companies with a minimum net worth of Rs 500 crore; and non-residents, other than individuals.
- Any user who is not eligible to be classified as a non-retail user shall be classified as a retail user.