Executive Summary:
The Reserve Bank of India (RBI) issued directions on March 27, 2019, regarding nonresident participation in Rupee Interest Rate Derivatives (IRD) markets. These directions, effective immediately, allow nonresidents to transact in Rupee IRDs for hedging interest rate risk and, under specific conditions, for purposes other than hedging. The directions outline eligibility, permissible instruments, and reporting requirements for these transactions.
Key Points / Main Content:
Eligibility and Scope:
* The directions apply to Rupee interest rate derivative transactions undertaken on recognized stock exchanges, electronic trading platforms (ETPs), and Over-the-Counter (OTC) markets in India.
* Nonresidents can participate in Rupee IRD markets for hedging Rupee interest rate risk or for purposes other than hedging, subject to certain conditions.
Hedging Transactions:
* Nonresidents may use permitted interest rate derivative products to hedge interest rate risk.
* Transactions must comply with Section 45V of the RBI Act, 1934, and the Foreign Exchange Management Act, 1999.
* Marketmakers must ensure transactions are for hedging purposes and may request relevant information from nonresidents.
Transactions for Purposes Other Than Hedging:
* Nonresidents (excluding individuals) can undertake Overnight Indexed Swaps (OIS) transactions for non-hedging purposes.
* Transactions can be done directly with a marketmaker in India or through a back-to-back arrangement via a foreign branch/parent group entity.
* All Rupee IRD transactions of related entities of the marketmaker must be accounted for in the marketmaker's books under the back-to-back arrangement, with exceptions for FPIs under para 4.
* OIS transactions for non-hedging purposes are subject to an overall limit of INR 3.50 billion Price Value of a Basis Point (PVBP) cap for all nonresidents.
* The PVBP of all outstanding OIS positions for any nonresident, including related entities, cannot exceed 10% of the PVBP cap.
* The Clearing Corporation of India Ltd. (CCIL) will monitor and publish PVBP limit utilization daily.
* Foreign Portfolio Investors (FPIs) may transact in interest rate futures (IRF) up to a net long position of INR 50 billion.
Payment and Reporting:
* Payments related to IRD transactions can be routed through a Rupee account or a Vostro account.
* Marketmakers must maintain transaction details.
* Marketmakers must ensure nonresident clients are from FATF-compliant countries and comply with KYC requirements.
* OTC transactions must be reported to CCIL's trade repository, indicating whether the trade is for hedging or other purposes.
* Marketmakers must report trade details, including nonresident client particulars, for OIS transactions under the back-to-back arrangement to the CCIL.
* Banks must report cross-border remittances from Rupee IRD transactions to the RBI monthly.
Impact Analysis:
Market Makers:
Impact: Responsible for ensuring nonresident transactions are for hedging, maintaining transaction records, and reporting trade details. They also need to conduct KYC checks and ensure nonresident clients are from FATF-compliant countries. They are also impacted by rules related to back-to-back arrangements and limits on OIS transactions.
Action Required: Implement procedures for verifying hedging purposes, maintain detailed records, conduct KYC checks, report transactions to CCIL, and monitor OIS transaction limits.
Nonresidents:
Impact: Can now participate in Rupee IRD markets for hedging and, under certain conditions, for non-hedging purposes. They are subject to restrictions on transaction types, reporting requirements, and PVBP limits.
Action Required: Provide information to market makers to verify hedging purposes, comply with transaction limits, and ensure payments are routed through appropriate accounts.
Clearing Corporation of India Ltd. (CCIL):
Impact: Responsible for trade repository services, publishing the methodology for PVBP calculation, and monitoring PVBP limit utilization.
Action Required: Develop and publish PVBP calculation methodology, monitor utilization of the PVBP limit, and provide trade repository services.
Banks (Authorised Dealers):
Impact: Handle cross-border remittances and must report these transactions to the RBI monthly.
Action Required: Report cross-border remittances to the RBI monthly in the prescribed format.
Key Entities Referenced
Reserve Bank of India: The central bank of India, which issued these directions.
Nonresident Participation in Rupee Interest Rate Derivatives Markets Reserve Bank Directions, 2019: The title of the policy document being analyzed.
Rupee Interest Rate Derivative: A financial instrument based on rupee interest rates, which is the subject of this policy.
Reserve Bank of India Act, 1934: The act that provides the Reserve Bank of India with the power to issue these directions.
Foreign Exchange Management Act, 1999: An act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India
Overnight Indexed Swap (OIS): An interest rate swap based on the Overnight Mumbai Interbank Outright Rate (MIBOR) benchmark.
Clearing Corporation of India Ltd. (CCIL): An organisation that provides clearing and settlement services for financial instruments in India.
Mumbai, Maharashtra: City in India, location of the Reserve Bank of India Central Office.
भारतीय �रज़व र् ब�क
RESERVE BANK OF INDIA
www.rbi.org.in
RBI/2018-19/151
FMRD.DIRD.13/14.03.041/2018-19 March 27, 2019
To
All participants in rupee interest rate derivative markets
Dear Sir/Madam
Non-resident Participation in Rupee Interest Rate Derivatives Markets (Reserve
Bank) Directions, 2019
Please refer to the Bi-monthly Monetary Policy Statement in April 2018 wherein it was
announced that non-residents shall be given access to the Rupee Interest Rate
Derivative (IRD) market in India.
2. The draft directions were released for public comments on December 05, 2018.
Based on the feedback received from market participants, the Non-resident
Participation in Rupee Interest Rate Derivatives Markets (Reserve Bank) Directions,
2019 have since been finalized. The Directions are enclosed herewith.
3. These Directions have been issued by RBI in exercise of the powers conferred under
section 45W of the Reserve Bank of India Act, 1934 and of all the powers enabling it in
this behalf.
Yours faithfully
(T. Rabi Sankar)
Chief General Manager
िव�ीय बाज़ार िविनयमन िवभाग, क��ीय कायार्लय, पहली मंिजल, मुख्य भवन, शहीद भगत �सह माग,र् फोटर्, मुंबई – 400 001, भारत
Financial Markets Regulation Department, Central Office, 1st Floor, Main Building, Shahid Bhagat Singh Road,
Fort, Mumbai – 400 001, India
फोन/Tel: (91-22) 2260 3000, फैक्स/Fax: (91-22) 22702290, ई-मेल /E-Mail: cgmfmrd@rbi.org.in
िहन्दी आसान ह,ै इसका �योग बढ़ाइए
1RESERVE BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
CENTRAL OFFICE, FORT
MUMBAI 400 001
Notification No. FMRD.DIRD.14/2019 dated March 27, 2019
Non-resident Participation in Rupee Interest Rate Derivatives Markets (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 by section 45W of the Reserve Bank of
India Act, 1934, (herein after 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 interest rate derivatives
in India.
1. Short title and commencement of the Directions
(1) These Directions shall be called the ‘Non-resident Participation in Rupee
Interest Rate Derivatives Markets (Reserve Bank) Directions, 2019’.
(2) These Directions shall be applicable to Rupee interest rate derivative
transactions in India, undertaken on recognized stock exchanges, electronic
trading platforms (ETP) and Over-the-Counter (OTC) markets to the extent stated
herein.
(3) These Directions shall come into force with immediate effect.
2. Definitions
For the purpose of these directions, unless the context otherwise requires,
i. Hedging is the activity of undertaking a derivative transaction to reduce an
identifiable and measurable risk. For the purpose of these directions, the relevant
risk is Rupee interest rate risk.ii. An interest rate swap is a financial contract between two parties
exchanging or swapping a stream of interest payments for a ‘notional principal’
amount on regular occasions during a specified period.
iii. A market-maker is an entity regulated by the Reserve Bank that provides
bid and offer prices to non-residents.
iv. Related entities are entities as defined under Para-9 of International
Accounting Standards -24 (IAS-24).
v. Non-resident is a person resident outside India as defined in section 2
(w) of Foreign Exchange Management Act, 1999 (42 of 1999).
vi. Overnight Indexed Swap (OIS) is an interest rate swap based on the
Overnight Mumbai Interbank Outright Rate (MIBOR) benchmark published by
Financial Benchmarks India Pvt. Ltd (FBIL).
vii. Recognized stock exchanges have the meaning assigned under Section
2 (f) of the Securities Contract Regulation Act, 1956.
viii. Users refer to all non-resident participants in Rupee interest rate
derivative markets.
3. A non-resident can undertake transactions in the Rupee interest rate derivatives
markets for the following purposes:
i. To hedge an exposure to Rupee interest rate risk as stipulated in para 4;
and,
ii. For purposes other than hedging, to the extent stipulated in para 5.
4. Transactions for the purpose of hedging interest rate risk
i. A non-resident may undertake Rupee interest rate derivatives in India to hedge
its interest rate risk using any permitted interest rate derivative product transacted
on recognized stock exchanges, ETPs or OTC markets.
ii. 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 applicableprovisions of Foreign Exchange Management Act, 1999 and the rules, regulations
and directions issued thereunder.
iii. Market-makers shall ensure that transactions by a non-resident are being
carried out for the purpose of hedging. For this purpose, market-makers may call
for any relevant information from the non-resident, who, in turn, is obliged to
provide such information.
5. Transactions for purposes other than hedging interest rate risk
i. Non-residents, other than individuals, may undertake Overnight Indexed Swaps
(OIS) transactions for purposes other than hedging interest rate risk in terms of the
following arrangements:-
(a) These transactions may be undertaken directly with a market-maker in
India, or by way of a ‘back-to-back’ arrangement through a foreign
branch/parent/group entity (foreign counterpart) of the market- maker.
Explanation – For the purpose of these directions, a ‘back-to-back’
arrangement means that the non-resident undertakes the transaction with
a foreign counterpart of the market-maker and the foreign counterpart, in
turn, immediately enters into an off-setting transaction with the market-
maker in India.
(b) A market-maker shall enter into a ‘back-to-back’ arrangement referred to
in (a) above provided that:
i. All rupee interest rate derivatives transactions, globally, of related
entities of the market-maker are accounted for in the books of the market-
maker. In other words, no related entity of the market-maker shall
undertake transactions in Rupee interest rate derivatives other than under
the ‘back-to-back’ arrangement.
ii. Rupee interest rate derivatives transactions of FPIs related to the
market-maker covered under para 4 above shall be exempted from the
requirement in para 5(i)(b)(i) above.
(c) OIS transactions by non-residents 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 undertaken by all non-residents shall not exceed the amount of
INR 3.50 billion (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 transactions for
purposes other than hedging after the PVBP cap is reached.
iii. The PVBP of all outstanding OIS positions for any non-resident
(including related entities) shall not exceed 10% of the PVBP cap.
iv. 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.
ii. Foreign Portfolio Investors (FPIs), collectively, may also transact in interest rate
futures (IRF) up to a limit of net long position of INR 50 billion in terms of RBI
circular No. FMRD.DIRD.6/14.03.001/2017-18 dated March 01, 2018.
6. Remittance/Payments
All payments related to interest rate derivative transactions of a non-resident may be
routed through a Rupee account of the non-resident or, where the non-resident doesn’t
have a Rupee account in India, through a vostro account maintained with an Authorised
Dealer bank in India. The market-maker shall maintain complete details of such
transactions.
7. 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.8. Reporting
i. All OTC rupee interest rate derivative transactions shall be reported by
market-makers and ETPs to the trade repository of CCIL, clearly indicating
whether the trade is for hedging or other purposes.
ii. 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.
iii. 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.ANNEX
Cross-border remittances arising out of Rupee interest rate derivatives
transactions undertaken by non-residents during MM/YY (month of year):
Inward remittance Outward remittance
(In USD) (In USD)
For hedging
For purposes other than hedging