What changed
RBI issued a clarification on December 19, 2013, that banks' participation in exchange-traded Interest Rate Futures (IRF) must follow guidelines from October 13, 2008 and August 28, 2009. Banks can use IRFs for hedging and trading, but client transactions remain prohibited. Standalone primary dealers face similar restrictions.
What it means for you
Banks and primary dealers have clear permission to use IRFs for managing interest rate risk on their own books and for proprietary trading. However, they cannot offer IRF trading services to clients, limiting revenue from this product. This aligns with RBI's cautious approach to derivative markets.
What you must do
- Review your bank's IRF trading policies to ensure compliance with the 2008 and 2009 circulars referenced.
- Confirm that IRF transactions are limited to hedging and proprietary trading, not client accounts.
- Update internal training materials to reflect that client IRF transactions are not permitted.
- Coordinate with your treasury and risk teams to align IRF activities with these guidelines.
Who it affects
All commercial banks (excluding RRBs and LABs), Standalone primary dealers
Can banks trade IRFs for clients under this circular?
No, banks are explicitly prohibited from undertaking IRF transactions on behalf of clients. Only hedging and proprietary trading are allowed.
Does this circular replace earlier IRF guidelines?
It clarifies that the December 2013 IRF directions supersede the 2009 directions, but banks must still follow the 2008 and 2009 circulars for participation rules.