Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 (Updated as on August 08, 2022) - ஆர்பிஐ - Reserve Bank of India
Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 (Updated as on August 08, 2022)
RBI/2018-19/222 June 26, 2019 To All participants in Rupee interest rate derivatives markets Dear Sir/Madam Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 Please refer to Paragraph 8 of the Statement on Developmental and Regulatory Policies, Reserve Bank of India, issued as part of the sixth Bi-monthly Monetary Policy Statement for 2018-19 dated February 07, 2019 regarding rationalization of interest rate derivative directions. 2. The draft directions was released for public comments on April 03, 2019. Based on the feedback received from the market participants, the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 has been reviewed and has since been finalized. The directions is enclosed herewith. Yours faithfully, (Dimple Bhandia) FINANCIAL MARKETS REGULATION DEPARTMENT Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 The Reserve Bank of India (hereinafter called the Reserve Bank) having considered it necessary in public interest and to regulate the financial system of the country to its advantage, in exercise of the powers conferred under section 45W of the Reserve Bank of India Act, 1934 (hereinafter called the Act) read with section 45U of the Act and of all the powers enabling it in this behalf, hereby issues the following directions to all entities including the non-residents, eligible to participate or transact in Rupee Interest Rate Derivatives in India. A reference is also invited to the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 (Notification No. FEMA 1 /2000-RB dated May 03, 2000) and Foreign Exchange Management (Debt Instruments) Regulations, 2019 (Notification No. FEMA 396/2019-RB dated October 17, 2019), as amended from time to time. 1. Short title, scope and commencement of the directions - (1) These Directions may be called the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 and shall supersede all other Directions indicated in Annex-I. (2) These Directions shall be applicable to Rupee interest rate derivatives transactions undertaken on recognized stock exchanges and Over-the-Counter (OTC) markets, including on electronic trading platforms (ETPs). (3) These Directions shall come into force with immediate effect. 2. Definitions -
3. Eligible Participants - (1) Any person resident in India and any non-resident, to the extent specified in these Directions, is eligible to participate in IRDs. All regulated entities shall participate in IRDs with the permission of and subject to the terms and conditions, if any, fixed by their respective regulators. (2) Indian or non-resident parent company or any group company or centralised treasury can transact in IRDs on behalf of their wholly owned subsidiaries or group companies provided they meet the criteria for non-retail users. 4. Trading Venues - IRD contracts can be transacted either (i) on Recognized Stock Exchanges (referred hereafter as exchanges), or, (ii) Over-the-Counter (OTC). OTC transactions shall refer to all transactions done outside of recognized stock exchanges and shall include transactions on Electronic Trading Platforms (ETPs). The directions governing activities in IRDs in each of these trading venues, viz., exchanges or OTC markets, are laid down separately. 5. Interest Rate Derivatives on Recognized Stock Exchanges - IRD transactions carried out on exchanges shall be subject to the following directions:
6. Interest Rate Derivatives in the OTC Market - IRD transactions in the OTC market shall be subject to the following directions: (a) Scheduled Banks, Standalone Primary Dealers (SPDs) and All-India Financial Institutions (AIFIs) are eligible to act as market-makers for IRD products in OTC markets. (b) Market-makers may offer the following products to retail users:
(c) In addition to the products listed in (b) above, market-makers may offer swaptions and structured derivative products, excluding leveraged derivatives, only to non-retail users. (d) Banks having Authorised Dealer Category-I (AD Cat-I) license under FEMA, 1999, and SPDs authorized under section 10(1) of FEMA, 1999 may offer FCS-OIS contracts to non-residents, other than individuals. Such entities may also undertake transactions in FCS-OIS contracts among themselves. Banks can undertake these transactions through their branches in India, through their International Financial Services Centre (IFSC) Banking Units (IBUs) or through their foreign branches (in case of foreign banks operating in India, through any branch of the parent bank). (e) For the purpose of offering IRD contracts to a user, market-makers shall classify a user either as a ‘retail’ user or as a ‘non-retail’ user:
(f) Market-makers shall ensure that transactions undertaken by retail users (including ‘non-retail’ users who choose to be classified as ‘retail’ users) are for the purpose of hedging an underlying interest rate risk. Resident ‘non-retail’ users can undertake transactions in permitted products for both hedging and otherwise. (g) A non-resident can undertake transactions in the Rupee interest rate derivatives markets for the following purposes:
(h) Any floating interest rate or price or index used in IRDs in the OTC market shall be a benchmark published by an FBA or approved by The Fixed Income Money Market and Derivatives Association of India (FIMMDA) for this purpose. FIMMDA shall ensure that the floating rate approved by them is determined transparently, objectively and in arm’s length transactions. (i) IRD transactions shall be settled bilaterally or through any clearing arrangement approved by the Reserve Bank for the purpose. FCS-OIS transactions may also be settled as decided bilaterally by the counterparties. (j) Settlement basis and other market conventions for IRD transactions may be specified by FIMMDA, where possible, in consultation with market participants. (k) The market hours for IRD transactions in OTC market shall be from 9:00 AM to 5:00 PM on each business day or as specified by the Reserve Bank from time to time. A market-maker may undertake transactions in FCS-OIS beyond onshore market hours. 7. Transactions by non-residents for the purpose of hedging interest rate risk -
8. Transactions by non-residents for purposes other than hedging interest rate risk - (a) Non-residents, other than individuals, may undertake Overnight Indexed Swaps (OIS) transactions, excluding transactions in FCS-OIS, for purposes other than hedging interest rate risk in terms of the following arrangements:
(b) Non-residents may also undertake FCS-OIS transactions with banks having AD Cat-I license and SPDs authorized under section 10(1) of FEMA, 1999 for purposes other than hedging interest rate risk. Transactions by non-residents in FCS-OIS may be undertaken directly with these entities. Transactions with banks having AD Cat-I license may also be undertaken by way of a ‘back-to-back’ arrangement through their foreign branches or through their IBUs. Explanation – For the purpose of these directions, a ‘back-to-back’ arrangement means that a non-resident undertakes the transaction with a foreign branch of a market-maker and the foreign branch, in turn, immediately enters into an off-setting transaction with that market-maker in India. (c) OIS transactions, including transactions in FCS-OIS, by non-residents with market-makers for purposes other than hedging interest rate risk shall be subject to an overall limit, as specified below: I. The Price Value of a Basis Point (PVBP) of all outstanding OIS positions, including FCS-OIS positions shall not exceed the amount of INR 350 crore (PVBP cap). Explanation – PVBP cap shall be calculated by making a gross addition, ignoring mathematical signs, of the PVBP of each non-resident. II. Non-residents shall not undertake any further OIS / FCS-OIS transactions for purposes other than hedging after the PVBP cap is reached. III. Clearing Corporation of India Ltd. (CCIL) shall publish the methodology for calculation of the PVBP and monitor as well as publish utilization of the PVBP limit on a daily basis. (d) Foreign Portfolio Investors (FPIs), collectively, may also transact in interest rate futures (IRF) up to a limit of net long position of INR 5,000 crore in terms of RBI circular No. FMRD.DIRD.6/14.03.001/2017-18 dated March 01, 2018. 9. A non-resident shall ensure that its interest rate derivative transactions conform to the provisions of Section 45(V) of the RBI Act, 1934, as well as applicable provisions of Foreign Exchange Management Act, 1999 and the rules, regulations and directions issued thereunder. 10. Remittance/Payments by non-residents - All payments related to interest rate derivative transactions of a non-resident, excluding FCS-OIS transactions, may be routed through an INR account of the non-resident or, where the non-resident doesn’t have an INR account in India, through a vostro account maintained with an Authorised Dealer bank in India. All payments related to FCS-OIS transactions may be routed through normal banking channels. The market-maker shall maintain complete details of such transactions. 11. KYC for the non-resident - Market-maker shall ensure that non-resident clients are from an FATF compliant country. Market-makers shall also ensure that non-resident clients comply with the KYC requirements as prescribed under Master Direction – Know your Customer Direction, 2016 (DBR.AML.BC.No.81/14.01.001/2015-16) dated February 25, 2016 as amended from time to time. 12. Conditions applicable to IRDs on both exchanges and in the OTC market - The following conditions shall apply to all IRDs, whether traded on an exchange or in the OTC market: Market-makers of IRDs in OTC markets shall comply with the ‘suitability and appropriateness’ requirements contained in the Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 issued by the Reserve Bank, as amended from time to time. Exchanges shall ensure that clients participating on exchanges are adequately made aware of the risks associated with the derivative instrument. Accounting, valuation and capital requirement for IRDs shall be as per the applicable accounting standards and valuation methods prescribed by ICAI or other standard setting organisation or as specified by the respective regulators of participants. 13. Regulatory reporting - (1) Market-makers in OTC transactions shall report all transactions, including client trades, within 30 minutes of the transactions, to the Trade Repository of Clearing Corporation of India Ltd. (CCIL), clearly indicating whether the trade is for hedging or other purposes. All FCS-OIS transactions undertaken by market-makers in India through their branches in India or through their foreign branches (in case of foreign banks operating in India, through any branch of the parent bank), shall be reported to CCIL’s Trade Repository before 12:00 noon of the following business day. (2) Market-makers shall report trade details, including particulars of the non–resident client for OIS transactions under the ‘back-to-back’ arrangement, to the trade repository of CCIL. (3) All resident users whose gross notional outstanding amount across different benchmarks/curves for all outstanding IRD contracts taken together reaches ₹1,000 crore at any point of time during a quarter shall report details of their risk positions at the end of that quarter in the prescribed format as furnished in Annex II. The report shall be routed through any bank or SPD with whom they undertake derivatives transactions. (4) Cross-border remittances arising out of transactions in Rupee interest rate derivatives shall be reported by banks to the Reserve Bank at monthly interval in the prescribed format as furnished in Annex III. 14. The list of previous circulars issued by the Reserve Bank that are repealed and withdrawn with immediate effect are given at Annex I hereunder. However, the directions contained in those circulars shall continue to apply to contracts undertaken in accordance with the said directions till the expiry of those contracts. List of circulars repealed and withdrawn Circular No. MPD.BC.187/07.01.279/1999-2000 dated July 7, 1999 Circular No. IDMD.PDRS.4802(A)/03.64.00/2002-03 dated June 11, 2003 Circular No. DBOD.BP.BC.No.56/21.04.157/2008-09 dated October 13, 2008 Circular No. FMD.MSRG No.39/02.04.003/2009-10 dated August 28, 2009 Circular No. IDMD.PDRD.No.1056/03.64.00/2009-10 dated September 1, 2009 Circular No. IDMD.PCD. 28/14.03.01/2010-11 dated March 7, 2011 Circular No. IDMD.PCD.17/14.03.01/2011-12 dated December 30, 2011 Circular No. IDMD.PCD.16/14.03.01/2011-12 dated December 30, 2011 Circular No. IDMD.PCD.2191/14.03.01/2012-13 dated January 28, 2013 Circular No. IDMD.PCD.08/14.03.01/2013-14 dated December 5, 2013 Circular No. IDMD.PCD.09/14.03.01/2013-14 dated December 19, 2013 Circular No. FMRD.DIRD.10/14.03.01/2014-15 dated June 12, 2015 Circular No. FMRD.DIRD.10/14.03.01/2016-17 dated October 28, 2016 Circular No. FMRD.DIRD.12/14.01.011/2016-17 dated December 29, 2016 Circular No. FMRD.DIRD.9/14.01.020/2017-18 dated June 14, 2018 Circular No. FMRD.DIRD.13/14.03.041/2018-19 dated March 27, 2019 Interest Rate Risk Positions for the quarter ended____ As on ____ (Date)
Cross-border remittances arising out of Rupee interest rate derivatives
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