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Entities permitted to act as market-makers in over-the-counter derivatives must comply with governance, product approval, user dealing conduct, risk management, internal control, internal audit, and record preservation standards. Market-makers must deal only in permitted derivative products, conduct pre-trade due diligence, execute transactions at prevailing market rates, and maintain independent valuations. The board of directors and senior management must establish comprehensive risk policies and oversight mechanisms. These directions apply to eligible market participants from January 03, 2022, and replace earlier comprehensive guidelines on derivatives.
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RBI/FMRD/2021-22/84 FMRD.FMD.07/02.03.247/2021-22 September 16, 2021 ( Updated as on February 21, 2025 ) To, All Eligible Market Participants Madam/Sir, Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 Please refer to Paragraph 11 of the Statement on Developmental and Regulatory Policies announced as a part of the Bi-monthly Monetary Policy Statement for 2020-21 dated December 04, 2020 , regarding review of the Comprehensive Guidelines on Derivatives (CGD).
Yours faithfully, (Dimple Bhandia) Chief General Manager FINANCIAL MARKETS REGULATION DEPARTMENT
Notification No. FMRD.FMD.08/02.03.247/2021-22 dated September 16, 2021
Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 ( Updated as on February 21, 2025 )
In exercise of the powers conferred under Section 45W of the Reserve Bank of India Act, 1934 (02 of 1934) (hereinafter called the Act) read with Section 45U of the Act, the Reserve Bank of India (hereinafter called the Reserve Bank) hereby issues the following Directions. A reference is also invited to the Foreign Exchange Management Act, 1999 (42 of 1999) and Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 ( Notification no. FEMA.25/RB-2000 dated May 3, 2000 ), as amended from time to time.
1.1 These Directions shall be called the Master Direction - Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021.
1.2 These Directions shall come into force on January 03, 2022.
1.3 These Directions shall apply to entities permitted to act as market-maker in OTC derivatives in terms of the Governing Directions.
2.1 In these Directions, unless the context otherwise requires:
(ia) 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.
(i) ‘Company’ shall have the same meaning as assigned to it in Section 2(20) of the Companies Act, 2013 (18 of 2013).
(ii) ‘Credit default swap’ means an OTC derivative 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.
(iii) ‘Currency swap’ means an OTC derivative which commits two counterparties to exchange streams of interest payments and/or principal amounts in different currencies on specified dates over the duration of the swap at a pre-agreed exchange rate.
(iv) ‘Derivative’ shall have the same meaning as assigned to it in Section 45U(a) of the Act.
(v) ‘Electronic Trading Platform (ETP)’ shall have the same meaning as assigned to it in Paragraph 2(1)(iii) of the Electronic Trading Platforms (Reserve Bank) Directions, 2018 dated October 05, 2018 , as amended from time to time.
(vi) ‘Exchange’ means ‘recognised stock exchange’ and shall have the same meaning as assigned to it in Section 2(f) of the Securities Contract Regulation Act, 1956 (42 of 1956).
(vii) ‘Foreign exchange forward’ means an OTC derivative involving the exchange of two currencies on a specified date in the future (more than two business days later) at a rate agreed on the date of the contract.
(viii) ‘Foreign exchange call option (European)’ means an OTC derivative that gives the buyer the right, but not the obligation, to buy an agreed amount of a certain currency with another currency at a specified exchange rate on a specified date in the future.
(ix) ‘Foreign exchange put option (European)’ means an OTC derivative that gives the buyer the right, but not the obligation, to sell an agreed amount of a certain currency for another currency at a specified exchange rate on a specified date in the future.
(x) ‘Foreign exchange swap’ means an OTC derivative involving the actual exchange of two currencies (principal amount only) on a specified date (the short leg) and a reverse exchange of the same two currencies at a date further in the future (the long leg), at rates agreed at the time of the contract.
(xi) ‘Forward rate agreement’ means a cash-settled OTC derivative between two counterparties, in which a buyer will pay or receive, on the settlement date, the difference between a pre-determined fixed rate (FRA rate) and a reference interest rate, applied on a notional principal amount, for a specified forward period.
(xii) ‘Governing Directions’ for an OTC derivative means the following:
(xiii) 'Interest rate cap’ means a series of interest rate call options (European) (called caplets) in which the buyer of the option receives a payment at the end of each period when the underlying interest rate is above a rate agreed in advance.
(xiv) ‘Interest rate floor’ means a series of interest rate put options (European) in which the buyer of the option receives a payment at the end of each period when the underlying interest rate is below a rate agreed in advance.
(xv) ‘Interest rate call option (European)’ means an OTC derivative that gives the buyer the right, but not the obligation, to buy an interest rate instrument or receive an interest rate on a notional principal at a pre-determined price/rate on a specified date in the future.
(xvi) ‘Interest rate put option (European)’ means an OTC derivative that gives the buyer the right, but not the obligation, to sell an interest rate instrument or pay an interest rate on a notional principal at a pre-determined price/rate on a specified date in the future.
(xvii) ‘Interest rate swap’ means an OTC derivative in which two counterparties agree to exchange one stream of future interest payments for another, applied on a notional principal amount, over a specified period.
(xviii) ‘Market-maker’ means an entity which provides prices to users and other market-makers.
Explanation: Authorised Persons, authorised as such under Section 10(1) of the Foreign Exchange Management Act, 1999 (42 of 1999), permitted to undertake foreign exchange derivative transactions with users and other Authorised Persons, shall be treated as market-makers for such transactions.
(xix) ‘Non-deliverable derivative’ shall have the same meaning as assigned to it in the Governing Directions.
(xx) ‘Over-the-counter (OTC) derivative’ means a derivative (deliverable and non-deliverable) other than those which are traded on exchanges and shall include those traded on electronic trading platforms (ETPs).
(xxi) ‘Person resident in India’ shall have the same meaning as assigned to it in Section 2(v) of the Foreign Exchange Management Act, 1999 (42 of 1999).
(xxii) ‘Person resident outside India’ shall have the same meaning as assigned to it in Section 2(w) of the Foreign Exchange Management Act, 1999 (42 of 1999).
(xxiii) ‘Structured derivative’ means an OTC derivative other than a generic derivative.
For the purpose of this definition, a generic derivative means the following:
(xxiv) ‘User’ shall have the same meaning as assigned to it in the Governing Directions.
