The Reserve Bank of India has issued final directions establishing a regulatory framework for forward contracts in government securities (bond forwards) undertaken in India’s over-the-counter market. The regime sets out who may transact, the roles and position limits for market-makers and users, and the settlement and reporting arrangements needed to support trading in bond forwards. Bond forwards are defined as rupee interest rate derivative contracts on a specific government security (excluding treasury bills), with transactions eligible for physical or cash settlement. Eligible participants include residents and non-residents permitted to invest in government securities under the Foreign Exchange Management (Debt Instruments) Regulations, 2019. Market-making is limited to scheduled commercial banks (excluding small finance banks, payment banks, local area banks and regional rural banks) and standalone primary dealers, with market-makers allowed unlimited long positions, covered shorts, and uncovered shorts only where short selling is permitted and within the applicable covering timeframe. Users must be eligible as non-retail users under the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019, may take unlimited long positions, and may take covered short positions only for hedging; at least one party to each trade must be a market-maker or an RBI-authorised central counterparty. Physical settlement must occur via the Clearing Corporation of India Ltd. or another RBI-approved clearing arrangement, while cash-settled trades may be settled bilaterally or through an approved arrangement; market-makers must report trades and specified lifecycle events to CCIL’s trade repository, and non-centrally cleared bond forwards are subject to the margining requirements for non-centrally cleared OTC derivatives. The directions take effect from 2 May 2025, and the RBI has also updated its master directions on market-makers in OTC derivatives and on margining for non-centrally cleared OTC derivatives to enable bond forward transactions. Market conventions and standard documentation are to be specified by the Fixed Income Money Market and Derivatives Association of India in consultation with market participants.
Reserve Bank of India 2025-02-21
Reserve Bank of India issues directions permitting OTC bond forwards in government securities effective 2 May 2025
The Reserve Bank of India has issued final directions for a regulatory framework governing forward contracts in government securities in the over-the-counter market. The framework outlines participant eligibility, market-maker roles, position limits, and settlement and reporting requirements. The directions, effective 2 May 2025, also update master directions on market-makers and margining for non-centrally cleared OTC derivatives.