What changed
RBI issued a clarification that banks are not permitted to undertake transactions in Interest Rate Futures (IRFs) on behalf of clients. This builds on the earlier permission allowing banks to take trading positions in IRFs. The guidelines also extend to overseas branches of Indian banks.
What it means for you
Banks must stop offering IRF trading services to clients immediately, limiting their IRF activity to proprietary trading only. This restricts a potential revenue stream from client advisory or execution services. Banks need to review their derivative product offerings and ensure compliance with the client prohibition.
What you must do
- Cease all IRF transactions on behalf of clients immediately.
- Ensure overseas branches also comply with the client prohibition.
- Review and adhere to the limit-setting guidelines for non-option derivative contracts from the December 2005 circular.
- Update internal policies and training to reflect the client trading ban.
Who it affects
All commercial banks (excluding RRBs and LABs), Overseas branches of Indian banks, Bank treasury and derivatives desks, Compliance and risk management teams
Can banks still trade IRFs for their own account?
Yes, banks are permitted to take trading positions in IRFs for their own books, as allowed by the earlier circular. The ban applies only to client transactions.
Does this apply to all types of clients?
Yes, the restriction covers all clients. Banks cannot undertake IRF transactions on behalf of any client.
What about existing client IRF positions?
The circular does not specify a transition period. Banks should immediately stop new client IRF trades and consult RBI for guidance on existing positions.