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

Highlights of RBI Annual Report 2023-24 – Chapter 7 to 12

Reserve Bank of India (RBI) has published its annual report for the financial year 2023-24. In a series of articles, we will go through the highlights of the report. This is the fifth and last article in the series.  Chapter 7 – Public Debt Management Ways And Means Advances (WMA) limit for the Government of India (GoI) for H1:2023-24 (April to September 2023) was fixed at ₹1,50,000 crore and for H2:2023-24 (October 2023 to March 2024) was fixed at ₹50,000 crore. RBI issued an ultra-long security of 50-year tenor aggregating ₹30,000 crore to cater to the growing needs of long-term institutional players. Issuance of Sovereign Green Bonds (SGrBs) for an aggregate amount of ₹20,000 crore included maiden issuance of 30-year (₹10,000 crore) SGrB in addition to 5-year (₹5,000 crore) and 10-year (₹5,000 crore) SGrBs. A new 3-year benchmark security was introduced as part of government market borrowing programme during H1:2023-24.  The basket of products offered through the ‘Retail ...
Post a Comment
Read more

Lending against Gold and Silver collateral

Reserve Bank of India (RBI) has issued directions on lending against the collateral of gold and silver. To whom are the directions applicable? The directions are applicable to the following regulated entities (REs) – Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, but excluding Payments Banks). Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). Which loans are covered under the directions? The directions shall apply to all loans offered by an RE for the purpose of consumption or income generation (including farm credit) where eligible gold or silver collateral is accepted as a collateral security. What is eligible collateral? Eligible collateral means the collateral of jewellery, ornaments or coins made of gold or silver. A lender shall not grant any ad...
Post a Comment
Read more

Prior approvals from or intimations / reporting to RBI by NBFC-BL

Non-Banking Financial Companies (NBFCs) are required to obtain prior approvals from Reserve Bank of India (RBI) or intimate / report to RBI various events. This article lists out some of such important events where prior approvals or intimations / reporting is required for Base Layer NBFCs (NBFC-BL). Events requiring prior approval from RBI  Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 dated October 19, 2023 Para 30 – NBFCs shall prepare its balance sheet and profit and loss account as on March 31 every year. Whenever an NBFC intends to extend the date of its balance sheet as per provisions of the Companies Act, 2013, it shall take prior approval of RBI before approaching the Registrar of Companies for this purpose. Even in cases where RBI and the Registrar of Companies grant extension of time, the NBFC shall furnish to RBI a proforma balance sheet (unaudited) as on March 31 of the year and the statutory returns ...
Post a Comment
Read more

RBI’s Monetary Policy (June 06, 2025): In A Nutshell

The bi-monthly monetary policy of Reserve Bank of India (RBI) was announced on June 06, 2025. Here are some of the highlights of the monetary policy announcement. Rates   Change Rate Policy repo rate Reduced by 0.50% 5.50% Standing deposit facility (SDF) rate 5.25% Marginal standing facility (MSF) rate 5.75% Bank rate 5.75% Monetary policy stance Monetary policy stance was changed from ‘accommodative’ to ‘neutral’. Domestic Economy  The Indian economy presents a picture of strength, stability, and opportunity. The 5x3x3 matrix of fundamentals provides the necessary core strength to cushion the Indian economy against global spillovers and propel it to grow at a faster pace.  First, strength comes from the strong balance sheets of the 5 major sectors - corporates, banks, households, government, and the external sector.  Second, there is stability on all 3 fronts – price, financial, and political – providing policy and economic certainty.  Third, the Indian ec...
Post a Comment
Read more

What is KYC?

Be it opening a new bank account, applying for a new credit card, registering for new e-wallet, or any other account or facility involving financial matters, the application process is incomplete until KYC is done.  What is KYC? KYC or Know Your Customer is a process of customer identification and verification while opening an account or undertaking a financial transaction. Why is KYC process needed? To prevent money laundering To combat financing of terrorism What is verified under KYC? The banks / financial institutions collect the relevant documents from the customers to verify the following – Proof of identity Proof of address Which documents can be collected for KYC? As per RBI’s Master Direction - Know Your Customer (KYC) Direction, 2016 (Updated as on May 10, 2021), “Officially Valid Document” (OVD) means – Passport Driving licence Proof of possession of Aadhaar number Voter's Identity Card issued by the Election Commission of India Job card issued by NREGA duly signed by an...
Post a Comment
Read more