The Reserve Bank of India today released the Report of the Working Group on Introduction of Interest Rate Options in India (Chairperson: Prof. P.G. Apte). The key recommendations of the Group are:

• To begin with, simple call and put Options, caps, floors, collars and swaptions may be permitted. Complex structures may be introduced subsequently.

• Both OTC as well as exchange traded options may be introduced. While in the OTC segment only European options may be permitted, both American and European structures may be permitted on Exchanges.

• Fixed Income Money Market and Derivatives Association of India (FIMMDA)/Financial Benchmark India Private Limited (FBIL) may come out with the list of eligible domestic money or debt market rates as benchmarks like G-Sec, T-Bills, MIBOR,OIS, MIFOR, IRF etc.

• While banks, PDs and other regulated entities having sound financials and prudent risk management may be allowed as market makers subject to the approval of concerned regulator, all domestic entities having underlying interest rate risk may be permitted as users.

• While no documentation relating to underlying exposure may be required for exposures upto Rs. 5 crore, large corporates may also be allowed to take hedging positions for their anticipated interest rate exposures.

Comments on the recommendations of the Group may be sent to email by February 26, 2016. Final guidelines will be issued by the end March, 2016 taking into account the feedback received.

Background

Currently, the only interest rate derivatives (IRD) permitted in India are Interest Rate Swap (IRS) and Forward Rate Agreement (FRA) in the OTC segment and Interest Rate Futures (IRF) on the Exchanges. IRS market has evolved over a period of time and is fairly liquid. Trading in IRF market has gradually increased with wider participation by different categories of participants. These IRDs can be used by the banks and other market participants to manage market risk effectively in their books. However, the financial entities, including banks, do not have any instruments to manage the embedded options on their balance sheets.

The Technical Advisory Committee (TAC) of the Reserve Bank on Financial markets, at its meeting held on April 21, 2015 had constituted a Working Group (Chairman: Prof P.G. Apte) to comprehensively look into all relevant issues and give recommendations on the framework for introduction of Interest Rate Options in India.

Alpana Killawala
Principal Adviser

Press Release : 2015-2016/1873