Skip to main content

Forward Contracts in Government Securities (Updated as on September 22, 2026)

Reserve Bank of India (RBI) has released directions on forward contracts in government securities.

What is Bond Forward?

Bond forward means a rupee interest rate derivative contract in which one counterparty (buyer) agrees to buy a specific government security from another counterparty (seller) on a specified future date and at a price determined at the time of the contract.

Which transactions shall be covered under the directions?

The directions shall apply to forward contracts in government securities (referred to as bond forwards) undertaken in the Over-the-Counter (OTC) market in India.

Who are market participants?

The following persons shall be eligible to undertake bond forward transactions –

  • A resident
  • A non-resident who is eligible to invest in Government Securities

Who are market-makers?

Market-maker means an entity which provides prices to users and other market-makers.

The following entities shall be eligible to undertake transactions in bond forwards as market-makers –

  • Scheduled Commercial Banks (except Small Finance Banks, Payment Banks, Local Area Banks and Regional Rural Banks)
  • Standalone Primary Dealers (SPDs)

What are the directions for market-makers?

  • A market-maker may undertake long positions without any limit and covered short positions in bond forwards.
  • A market-maker, permitted to undertake short sales, shall also be eligible to undertake uncovered short positions subject to the underlying government security being eligible for short sale. Such uncovered short positions shall be reckoned in the security level limits on short sales and cannot remain uncovered for a period exceeding the maximum period specified for covering a short position in the Short Sale (Reserve Bank) Directions, 2018 dated July 25, 2018.
  • At least one of the parties to a bond forward transaction shall be a market-maker or a central counter party authorised by the RBI.

Who are users?

User means a person that undertakes transactions in bond forwards other than as a market-maker.

Any entity, eligible to be classified as a non-retail user in terms of the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019, dated June 26, 2019, shall be eligible to undertake transactions in bond forwards as a user.

What are directions for users?

  • An eligible resident user may undertake long positions in bond forwards without any limit.
  • An eligible user (resident and non-resident) may undertake covered short positions in bond forwards only for the purpose of hedging.
  • A user with a covered short position in a bond forward shall exit its short position in case it ceases to hold the underlying government security.

What are Covered and Uncovered Short?

  • Covered Short means a position in bond forwards in which the seller of the forward contract holds an equivalent amount of the government security underlying the position.
  • Uncovered Short means a short position in a bond forward other than a covered short position.

What is Cash and Physical settlement?

  • Cash settlement of a bond forward means a settlement process in which the cash settlement value of the forward contract as on the maturity / termination date is exchanged between the counterparties under the terms of the contract.
  • Physical settlement of a bond forward means a settlement process in which the seller transfers the underlying government security to the buyer, against the receipt of the contracted price from the buyer, under the terms of the contract.

What are the directions for settlement or unwinding?

  • A bond forward transaction may be physically-settled or cash-settled.
  • A physically-settled bond forward transaction shall be settled through the Clearing Corporation of India Ltd. (CCIL).
  • A cash-settled bond forward transaction may be settled bilaterally or through any clearing arrangement approved by RBI.
  • The settlement basis and market conventions for bond forward transactions shall be specified by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), in consultation with market participants. 

What are the directions on novation? (Updated as on September 22, 2026)

  • Novation means the replacement of a market maker with another market maker in an OTC derivative contract between two counterparties (transferor, who steps out of the existing deal, and remaining party) to an OTC derivative transaction with a new contract between remaining party and a third party (transferee). The transferee becomes the new counterparty to the remaining party.
  • Remaining Party in novation means the user or a market maker or a central counterparty that continues to be a counterparty in the new contract post novation.
  • A market participant may exit its position in a bond forward by unwinding the position with the original counterparty. A market maker may also exit its position in a bond forward by assigning the position to any other eligible market maker through novation subject to the following –
    • The novation shall be done at the prevailing market rates and with the prior consent of the remaining party, with the amount corresponding to the mark-to-market of the OTC derivative exchanged upfront between the transferor and the transferee.
    • The parties to a novation shall enter into a tripartite agreement wherein the transferee steps in the contract to face the remaining party and the transferor steps out. The original contract shall stand extinguished and shall be replaced by a new contract with identical terms / parameters to the original contract, except for the change in counterparty for the remaining party.
    • The transferor and the transferee may agree on the charge / fee between them for the transfer of the trade. The fees and their settlement terms may not form part of the novation agreement.
  • These directions shall not apply to the novation of an OTC derivative contract undertaken –
    • by a central counterparty, for the purpose of effecting settlement; or
    • in terms of RBI circular on ‘Novation of an OTC contracts’ dated December 09, 2013.

What are other directions?

  • Government securities held to cover short positions in bond forwards may be used in a repo transactions or lent / placed as collateral under a Government Securities Lending (GSL) transactions subject to the condition that the holder of the short position is otherwise eligible to undertake a repo / GSL transaction.
  • Government securities held to cover short positions in bond forwards shall be eligible to be reckoned for Statutory Liquidity Ratio (SLR) by the entity covering the short position, provided that the security is otherwise eligible to be reckoned for SLR.
  • A bond forward transaction that is not centrally cleared shall be subject to requirements for exchange of variation and initial margin in terms of the provisions of the Master Direction – Reserve Bank of India (Margining for Non-Centrally Cleared OTC Derivatives) Directions, 2024 dated May 08, 2024.

From when will the directions be effective?

The directions shall come into force with effect from May 02, 2025.


References

Reserve Bank of India. (2025, February 21). 'Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12784&Mode=0

Reserve Bank of India. (2026, September 22). Novation of OTC Derivative Contracts. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13706&Mode=0


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) (Updated as on September 11, 2026)

Reserve Bank of India (RBI) has issued the directions on maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) by banks. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Payments Banks (PBs) Local Area Banks (LABs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Rural Co-operative Banks – State Co-operative Banks (StCBs) District Central Co-operative Banks (DCCBs) What is CRR? Every bank shall maintain in India by way of cash reserve, a sum equivalent to such percent of its Net Demand and Time Liabilities (NDTL) in India, as the RBI in terms of Section 42(1) of the RBI Act, 1934 (for scheduled banks) and Section 18(1) of the Banking Regulation Act (BR Act), 1949 (for non-scheduled banks) [including provisions of Section 18(1) of the BR Act as applicable to co-operative banks], may specify. What is incremental CRR? In terms of Secti...
Post a Comment
Read more

Policies to be formulated by NBFC-BL

Non-Banking Financial Companies (NBFCs) are required to formulate various policies for effective corporate governance and operations. This article lists out some of the important policies to be formulated by the Base Layer NBFCs (NBFC-BL). Business Model Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 dated October 19, 2023 Para 1.1 of Annex II – In view of the criticality of the nature of the business model in determining the classification of financial assets and restrictions on subsequent reclassification, NBFCs are advised to put in place Board approved policies that clearly articulate and document their business models and portfolios. Para 1.2 of Annex II – NBFCs shall frame their policy for sales out of amortised cost business model portfolios. Expected Credit Losses (ECL) Policy Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 dated October 19, 202...
Post a Comment
Read more

Unique Transaction Identifier (UTI) for OTC Derivative Transactions

Reserve Bank of India (RBI) has issued directions on Unique Transaction Identifier (UTI) for over-the-counter (OTC) derivative transactions. What are the existing norms for reporting of OTC derivative transactions? At present, all transactions in OTC markets for rupee interest rate derivatives, forward contracts in Government securities, foreign currency derivatives, foreign currency interest rate derivatives, and credit derivatives are reported to the Trade Repository managed by Clearing Corporation of India Limited (CCIL-TR).  What are the directions on Unique Transaction Identifier (UTI) for OTC derivative transactions? Unique Transaction Identifier (UTI), a unique identifier assigned to an OTC derivative transaction, shall be generated / reported for all transactions in OTC derivatives market.  The directions shall be applicable to OTC derivative transactions entered into on or after January 01, 2027. UTI shall be generated in accordance with the UTI Technical Guidanc...
Post a Comment
Read more

Credit Derivatives (Updated as on September 22, 2026)

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Framework for Self-Regulatory Organisations in the FinTech Sector (Updated on September 10, 2026)

Reserve Bank of India (RBI) has released the framework for self-regulatory organisations in the FinTech sector. What are FinTechs? For the purpose of membership of an Self-Regulatory Organisations for FinTech Sector (SRO-FT), FinTechs may be defined as entities that provide technological solutions for delivery of financial products and services to businesses and consumers or encompass regulatory and supervisory compliance in partnership with traditional financial institutions or otherwise.  What is the need of Self-Regulatory Organisations for FinTech Sector? FinTechs play a pivotal role in redefining financial services by saving time, enhancing access, and lowering costs. While the FinTechs bring various innovations, the FinTech sector also raises concerns relating to customer protection, data privacy, cyber security, grievance handling, internal governance, financial system integrity, etc. A judicious balance between maximising the creative potential of FinTechs, while minimising...
Post a Comment
Read more