The Reserve Bank of India (“RBI”) in exercise of powers conferred under Section 45(W) of the Reserve Bank of India Act, 1934, (the “Act”) read with Section 45(U) of the Act, vide Notification No. FMRD.DIRD.17/14.03.042/2024-25[1], dated February 21, 2025, issued the Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025 (the “Forward Contracts Directions”). The Forward Contracts Directions shall come into force on May 02, 2025.
The key features of the Forward Contracts Directions are as follows:
1. Eligible Participants:
The following entities shall be eligible to undertake bond forward transactions:
(a) Residents; and
(b) Non-residents, who are eligible to invest in Government Securities under the Foreign Exchange Management (Debt Instruments) Regulations, 2019, as amended from time to time.
2. Market Makers and Users:
(a) Market-Makers:
(i) Market-maker shall mean an entity which provides prices to users and other market-makers.
(ii) Scheduled Commercial Banks (except Small Finance Banks, Payment Banks, Local Area Banks, and Regional Rural Banks) and Standalone Primary Dealers (SPDs) may be the eligible entities to undertake transactions in bond forwards as market-makers.
(iii) A market-maker may take long positions without any limit and covered short positions in bond forwards.
(iv) A market-maker, authorized to undertake short sales under the Short Sale (Reserve Bank) Directions, 2018 (as amended), may also take uncovered short positions, provided that the underlying government security is eligible for short sale. Such positions shall be included within the security-level limits on short sales and must be covered within the maximum period prescribed under the applicable regulations.
(v) Every bond forward transaction must include at least 1 (one) market-maker, or a central counterparty authorized by the Reserve Bank.
(b) Users:
(i) 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, as amended from time to time, shall be eligible to undertake transactions in bond forwards as a user.
(ii) An eligible resident user may take long positions in bond forwards without any limit.
(iii) An eligible user (resident or non-resident) may take covered short positions in bond forwards solely for hedging purposes.
(iv) To ensure that a user’s short position remains covered, market-makers may request relevant information or documents, which the user shall be obligated to provide.
(v) A user holding a covered short position in a bond forward shall exit the position, if it no longer holds the underlying government security.
3. Settlement and Unwinding:
(a) Bond forwards may be physically settled, where the underlying security is transferred or they may be cash settled, where only the settlement value is exchanged.
(b) Physically settled transactions shall be cleared through Clearing Corporation of India Ltd. (“CCIL”) or any RBI-approved clearing arrangement.
(c) Cash-settled transactions may be settled bilaterally or through RBI-approved clearing arrangements.
(d) Participants may unwind or novate their bond forward positions in accordance with RBI’s existing guidelines.
4. Reporting Requirements:
(a) Market-makers shall report all bond forward transactions to the Trade Repository (“TR”) of CCIL before the TR’s daily closure, wherein the reporting shall include details such as counterparties, underlying securities, settlement type, and short position classification.
(b) Market-makers must also reconcile outstanding balances with the TR and ensure concurrent audits.
5. Market Timing:
Bond forward transactions shall be conducted during the market hours specified by the Reserve Bank for Over The Counter Rupee Interest Rate Derivative transactions.
6. Regulatory and Compliance Obligations
(a) The Fixed Income Money Market and Derivatives Association of India (FIMMDA) shall prescribe market conventions and documentation for bond forwards.
(b) Market participants shall comply with applicable prudential norms, including capital adequacy and accounting standards.
(c) Government securities held for covered short positions may be used for repo transactions or Government Securities Lending (GSL) transactions, subject to eligibility.
(d) Bond forward transactions that are not centrally cleared shall be subject to margin requirements as per RBI’s Master Directions.
[1] https://website.rbi.org.in/web/rbi/-/notifications/reserve-bank-of-india-forward-contracts-in-government-securities-directions-2025