Skip to main content

Forward Contracts in Government Securities

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.
  • A market participant may exit its position in a bond forward by unwinding the position with the original counterparty or assigning the position to any other eligible market participants through novation. 
  • 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 is novation?

Novation is the replacement of a contract between two counterparties to an OTC derivatives transaction (the transferor, who steps out of the existing contract, and the remaining party) with a new contract between the remaining party and a third party (the transferee). The transferee becomes the new counterparty to the remaining party.

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


Follow at - Telegram   Instagram   LinkedIn   X   Facebook

Labels:

Comments

Post a Comment

Popular Posts

Reserve Bank - Integrated Ombudsman Scheme, 2026 (RB-IOS, 2026)

Reserve Bank of India (RBI) has issued Reserve Bank - Integrated Ombudsman Scheme, 2026. Who is RBI Ombudsman and RBI Deputy Ombudsman? RBI may appoint one or more of its officers as RBI Ombudsman and RBI Deputy Ombudsman, to carry out the functions entrusted to them under the Reserve Bank - Integrated Ombudsman Scheme (RB-IOS).  The appointment of RBI Ombudsman or RBI Deputy Ombudsman shall be for up to 3 years at a time. RBI Ombudsman shall have the power to examine and close all complaints.   RBI Deputy Ombudsman shall have the power to close those complaints falling under clause 10 of the RB-IOS (i.e. non-maintainable complaints) and complaints resolved as per the provisions of the clause 14(8)(a) to 14(8)(c) of the RB-IOS (i.e. complaint resolved / withdrawn). Which entities are covered under the RB-IOS? RB-IOS shall be applicable to the following Regulated Entities (REs) – Commercial Banks Regional Rural Banks  State Co-operative Banks Central Co-operative Bank...
Post a Comment
Read more

Modified Interest Subvention Scheme for Agricultural Loans

Reserve Bank of India (RBI) has published the modified interest subvention scheme (MISS) for short term loans for agriculture and allied activities availed through Kisan Credit Card (KCC) during the financial year 2025-26. Which loans are covered under modified interest subvention scheme (MISS)? The short-term crop loans and short-term loans for allied activities including animal husbandry, dairy, fisheries, bee keeping etc. up to an overall limit of ₹3 lakh to farmers through KCC during the year 2025-26 will be covered for interest subvention. Which lending institutions are covered under MISS? The MISS is applicable to the lending institutions viz. Public Sector Banks (PSBs) and Private Sector Banks (in respect of loans given by their rural and semi-urban branches only), Small Finance Banks (SFBs) and computerized Primary Agriculture Cooperative Societies (PACS) ceded with Scheduled Commercial Banks (SCBs), on use of their own resources.  How much is the interest subvention? The a...
Post a Comment
Read more

Internal Ombudsman for Regulated Entities (Banks, NBFCs, PPI Issuers and CICs)

Reserve Bank of India (RBI) has issued directions on Internal Ombudsman for regulated entities. To whom shall the directions on Internal Ombudsman (IO) be applicable? The directions on IO shall be applicable to the following Regulated Entities (REs) – Commercial Banks (other than Small Finance Banks, Payment Banks, and Local Area Banks) having 10 or more banking outlets in India as on March 31, 2025, whether such bank is incorporated in / outside India Small Finance Banks having 10 or more banking outlets in India as on March 31, 2025 Payments Banks having 10 or more banking outlets in India as on March 31, 2025 Non-Banking Financial Companies (NBFCs) fulfilling the following criteria as on March 31, 2025 – Deposit-taking NBFCs (NBFCs-D) with 10 or more branches Non-Deposit taking NBFCs (NBFCs-ND) with asset size of ₹5,000 crore and above and having public customer interface Non-Bank Prepaid Payment Instruments Issuers having more than 1 crore Prepaid Payment Instruments (PPIs) outstan...
Post a Comment
Read more

Financial Literacy Week (FLW) 2026

Reserve Bank of India (RBI) has observed financial literacy week from February 09 to 13, 2026. Financial Literacy and Financial Education Organization for Economic Co-operation & Development (OECD) defines ‘financial literacy’ as a combination of financial awareness, knowledge, skills, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being.  OECD defines ‘financial education’ as the process by which financial consumers / investors improve their understanding of financial products, concepts and risks and through information, instruction and / or objective advice, develop the skills and confidence to become more aware of financial risks and opportunities, to make informed choices, to know where to go for help and to take other effective actions to improve their financial well-being. Financial Literacy Week (FLW) Reserve Bank of India (RBI) has been observing Financial Literacy Week (FLW) every year since 2016 to p...
Post a Comment
Read more

What is Reserve Bank of India – Digital Payments Index (RBI-DPI)? (Updated on February 12, 2026)

There have been continuous efforts by various stakeholders for digitization of payments in the country. But how to we measure the impact of these efforts?  What is Reserve Bank of India – Digital Payments Index (RBI-DPI)? Reserve Bank of India (RBI) has constructed a composite Digital Payments Index (DPI) to capture the extent of digitization of payments across the country. What are the parameters of RBI-DPI? The RBI-DPI comprises of five broad parameters that enable measurement of deepening and penetration of digital payments in the country over different time periods. These parameters along with their weights in the RBI-DPI are as follows –  Payment Enablers (25%) Payment Infrastructure – Demand-side factors (10%) Payment Infrastructure – Supply-side factors (15%) Payment Performance (45%) Consumer Centricity (5%).  Each of these parameters have sub-parameters which, in turn, consist of various measurable indicators.  What is the base year for RBI-DPI? The RBI-DPI ...
Post a Comment
Read more