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RBI issues draft on rupee IR derivatives

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

RBI issues draft on rupee IR derivatives:


Context:

RBI has released the draft version of Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2020.

  • They are aimed at encouraging higher non-resident participation, enhance the role of domestic market makers in the offshore market, improve transparency, and achieve better regulatory oversight.

Key directions:

  • It seeks to allow foreign portfolio investors (FPIs) to undertake exchange-traded rupee interest rate derivatives transactions subject to an overall ceiling of Rs 5,000 crore.
  • Net short position of an FPI on exchange-traded IRDs should not exceed its long position in government securities and other rupee debt securities.
  • The purpose of offering Rupee IRD contracts to a user, the market-maker (entities which provide bid and offer prices to users in order to provide liquidity to the market) should classify the user either as a retail user or as a non-retail user.
  • Non-retail users, as per the draft, are entities regulated by RBI, SEBI, IRDAI or PFRDA; resident companies with a minimum net worth of Rs 500 crore; and non-residents, other than individuals.

What are IRDs?

Interest Rate Derivatives (IRD) are contracts whose value is derived from one or more interest rates, prices of interest rate instruments, or interest rate indices.

  • These may include interest rate futures, options, swaps, swaptions, and FRA’s.

Sources: the Hindu.