Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 (Updated as on February 21, 2025)
UR
- Applies toBanks and other entities RBI has permitted to act as a market-maker in OTC derivatives
- StatusIn force
- IssuedSep 16, 2021
- Amendmentsnone tracked
- Length28 points in 5 sections · 3 min read
The four dates on this rule
- PublishedSep 16, 2021The day RBI put this document out. This is the same day as the Issued date on this rule.
- Starts to applyJanuary 03, 2022The day this rule starts to apply, as RBI's own text states it.
- Time to get ready109 daysThe room between the day it was published and the day it starts to apply.
- Last date to actNot statedNo date to act by was found in this document. Other dates may sit inside single paragraphs.
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What it says
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Stated by RBI — RBI’s own paragraph says this. We have only made it plainer.
Our reading — BankPulse read RBI’s paragraph and shortened it. The paragraph is the authority, not this line.
Needs judgement — RBI leaves this to the bank to settle, so nobody can give you a fixed number here.
Must know
1. Applies to market-makers
This rule covers entities RBI has let act as a market-maker in derivatives.
2. Who counts as a market-maker
FEMA can let a bank's dealing desk trade in foreign exchange derivatives. That desk then counts as a market-maker.
3. Board must understand the business
The board and senior managers must fully understand this derivative business.
4. Board must approve written policy
The board must approve one written policy for this whole business and its risks.
5. Only permitted products allowed
A market-maker may deal only in products the Governing Directions permit.
6. No dealing in unpriceable products
A market-maker may not deal in a product, even back-to-back, that it cannot price on its own.
7. CCO and CRO sign off
The Chief Compliance Officer and Chief Risk Officer must both sign off before any new product is approved.
8. Product must suit the user
The product offered must suit the user's own objective and appetite for risk.
9. Deals must be fair
Every derivative deal must be fair and clear.
10. Confirmation for every deal
The user gets a confirmation for each deal, or one combined confirmation for a day's deals.
11. Information must be in writing
Every important piece of information given to the user must be in writing.
12. Risks must be identified
A market-maker must list every risk in this business. It must also set risk limits.
13. Stress testing required
The market-maker must stress-test its risk positions.
14. Trading desk kept separate
The trading desk and the back-office desk that settles trades must be kept separate.
15. Internal audit is required
The derivative business must go through a proper internal audit.
16. Auditors must be independent
The internal auditors must be independent of the business line they audit.
17. Unfixed issues reach the board
If management does not fix an audit finding in time, the Audit Committee must be told.
18. Records follow legal retention
Records must be kept for however long the law already requires.
19. Two-year floor on records
Even with no legal minimum, a record must still be kept for at least two years after the deal ends.
Background
1. Called the 2021 Directions
This rulebook is the 2021 Directions for market-makers in OTC derivatives.
2. Effective 3 January 2022
The rule started on 3 January 2022.
3. What a market-maker is
A market-maker is an entity that quotes prices to users and to other market-makers.
4. OTC derivative defined
An OTC derivative is not traded on an exchange. It can trade on an electronic platform.
5. Simple forex deals are exempt
Simple, short-tenor foreign exchange forwards and options up to 13 months skip this extra due diligence.
6. Legal risk must be managed
A contract that cannot be enforced is a legal risk. It is managed with papers like the ISDA agreement.
7. Counterparty risk must be managed
The risk of a counterparty failing must be checked. Collateral is used where that is allowed.
8. Old circulars repealed
This rule repeals four older RBI circulars on derivatives the day it takes effect.
9. Old rules still apply sometimes
A deal started under an old circular still follows that circular until it ends.