What changed
RBI issued the Interest Rate Futures (Reserve Bank) Directions, 2013, superseding the 2009 Directions. The key change is the introduction of cash-settled IRF on the 10-year Government of India security, as announced in the Second Quarter Review of Monetary Policy 2013-14. The eligible instruments now include 91-day Treasury Bills, 2-year, 5-year, and 10-year coupon-bearing notional Government securities, and coupon-bearing Government of India security.
What it means for you
Banks and market participants can now hedge interest rate risk more precisely with a cash-settled 10-year IRF, reducing settlement complexities. The expanded list of eligible instruments offers greater flexibility for managing duration exposure. FIIs must ensure their short IRF positions do not exceed their long positions in government securities and IRFs combined, reinforcing regulatory oversight.
What you must do
- Review the new Interest Rate Futures (Reserve Bank) Directions, 2013 and update internal risk management policies accordingly.
- Ensure compliance with the conditions for FIIs: total gross long positions in spot G-secs and IRFs must stay within aggregate permissible limits, and total gross short positions in IRFs must not exceed their long positions in G-secs and IRFs.
- Verify that any scheduled bank or agency under RBI's regulatory purview obtains explicit RBI permission before participating in the IRF market.
- Train trading and compliance teams on the cash-settled 10-year IRF contract specifications and settlement mechanics.
Who it affects
All market participants trading Interest Rate Futures, Scheduled banks and RBI-regulated entities, Foreign Institutional Investors (FIIs) investing in government securities, Recognized stock exchanges offering IRF contracts
What is the key change in the 2013 IRF Directions compared to the 2009 version?
The 2013 Directions introduce cash-settled Interest Rate Futures on the 10-year Government of India security, which was not explicitly covered earlier. They also consolidate and revise all existing instructions, superseding the 2009 Directions.
Are banks allowed to trade IRF under the new directions?
No scheduled bank or agency falling under the regulatory purview of the Reserve Bank shall participate in the IRF market until such participation has been permitted by the Reserve Bank.
What are the eligible underlying instruments for IRF under the 2013 Directions?
The eligible instruments are 91-Day Treasury Bills, 2-year, 5-year, and 10-year coupon-bearing notional Government of India security, and coupon-bearing Government of India security.