What changed
RBI allowed trading of Interest Rate Futures on a 10-year notional coupon-bearing government security. The directions under Section 45W of the RBI Act, 1934, came into immediate effect. Banks and other RBI-regulated entities must obtain specific permission before participating.
What it means for you
Banks and lenders can now use exchange-traded interest rate futures to manage interest rate risk on their government securities portfolios. However, the requirement for prior RBI permission adds a compliance step. FIIs are restricted to hedging only on the short side, with aggregate positions capped by their g-sec investment limits.
What you must do
- Review your bank's current interest rate risk exposure and assess if IRF trading is needed.
- Apply for explicit permission from the relevant RBI regulatory department before participating in the IRF market.
- Ensure FII clients' gross long positions in cash and IRF markets stay within their g-sec investment limit.
- Update internal risk management policies to include IRF position monitoring and reporting.
Who it affects
Scheduled commercial banks, Primary dealers, Urban cooperative banks, Non-banking finance companies, All India Financial Institutions, Foreign Institutional Investors
Can my bank start trading interest rate futures immediately?
No. Banks and other RBI-regulated entities must first obtain permission from the respective regulatory department of RBI before participating in the IRF market.
What is the underlying instrument for these IRFs?
The permitted instrument is a 10-year notional coupon-bearing Government of India security, or any other product approved by RBI from time to time.
Are FIIs allowed to take short positions in IRFs?
Yes, but only for hedging purposes. Their total gross short position must not exceed their long position in government securities and IRFs at any point.