Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025

RBI/2024-25/117 FMRD.DIRD.16/14.03.042/2024-25 February 21, 2025

To All Eligible Market Participants

Madam/Sir,

Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025

Please refer to press release dated December 28, 2023, regarding issuance of draft Directions on Bond Forwards for public feedback.

2. Based on the feedback received from the market participants, the draft Directions have been finalised and the Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025, are being issued herewith. Necessary amendments to the Gazette Notification (S.O. 2192 (E) dated 8th January 2010) have been notified in the Official Gazette vide Gazette Id no. CG-MH-E-13022025-260991 dated February 13, 2025, a copy of which is annexed to this circular.

3. Further, the following Directions have been updated, as attached, to enable transactions in forward contracts in government securities:

• Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021; and
• Master Direction – Reserve Bank of India (Margining for Non-Centrally Cleared OTC Derivatives) Directions, 2024.

4. These Directions have been issued in exercise of the powers conferred under section 45W of the Reserve Bank of India Act, 1934 read with section 45U of the Act and of all the powers enabling it in this behalf.

Yours faithfully,

(Dimple Bhandia) Chief General Manager

RESERVE BANK OF INDIA FINANCIAL MARKETS REGULATION DEPARTMENT 9TH FLOOR, CENTRAL OFFICE, FORT MUMBAI 400 001

Notification No. FMRD.DIRD.17/14.03.042/2024-25 dated February 21, 2025

Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025

In exercise of the powers conferred under section 45W of the Reserve Bank of India Act, 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 (Debt Instruments) Regulations, 2019 (Notification No. FEMA. 396/2019-RB dated October 17, 2019).

1. Short title, commencement and applicability of Directions:

(i) These Directions shall be called the Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025.

(ii) These Directions shall apply to forward contracts in government securities (hereinafter referred to as bond forwards) undertaken in the Over-the-Counter (OTC) market in India.

(iii) These Directions shall come into force with effect from May 02, 2025.

2. Definitions

(i) For the purpose of these Directions, unless the context otherwise requires:

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.

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.

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.

Electronic Trading Platform (ETP) shall have the same meaning as defined in para 2(1) (iii) of the Electronic Trading Platforms (Reserve Bank) Directions, 2018 dated October 05, 2018, or as modified from time to time.

Exchange means a recognised stock exchange as defined under section 2(f) of the Securities Contracts (Regulation) Act, 1956.

Government Security shall have the same meaning as defined in Section 2(f) of the Government Securities Act, 2006, and for the purpose of these Directions shall exclude treasury bills.

Government Securities Lending (GSL) transaction shall have the same meaning as defined in para 2(1)(f) of the Reserve Bank of India (Government Securities Lending) Directions, 2023 dated December 27, 2023, or as modified from time to time.

Market-maker means an entity which provides prices to users and other market-makers.

Non-resident is a person resident outside India as defined in section 2 (w) of Foreign Exchange Management Act, 1999 (42 of 1999).

Over-the-Counter (OTC) market refers to a market where bond forward transactions are undertaken in any manner other than on exchanges and shall include those undertaken on electronic trading platforms (ETPs).

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.

Repo shall have the same meaning as defined in Section 45U (c) of the RBI Act, 1934.

Uncovered Short means a short position in a bond forward other than a covered short position.

User means a person that undertakes transactions in bond forwards other than as a market-maker.

(ii) Words and expressions used, but not defined in these Directions, shall have the same meaning as assigned to them in the Act or in the Government Securities Act, 2006.

3. Eligible Market Participants

The following persons shall be eligible to undertake bond forward transactions to the extent permitted under these Directions:

• A resident; and
• A non-resident who is eligible to invest in Government Securities under the Foreign Exchange Management (Debt Instruments) Regulations, 2019 dated October 17, 2019, as amended from time to time.

4. Market-makers and Users

4.1 Market-makers

(i) The following entities shall be eligible to undertake transactions in bond forwards as market-makers:

• A Scheduled Commercial Bank (except a Small Finance Bank, a Payment Bank, a Local Area Bank and a Regional Rural Bank); and
• A Standalone Primary Dealer (SPD).

(ii) A market-maker may undertake long positions without any limit and covered short positions in bond forwards.

(iii) A market-maker, permitted to undertake short sales, in terms of the Short Sale (Reserve Bank) Directions, 2018, dated July 25, 2018, as amended from time to time, 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, as amended from time to time.

(iv) At least one of the parties to a bond forward transaction shall be a market-maker or a central counter party authorised by the Reserve Bank for the purpose.

4.2 Users

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.

4.2.1 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.
• To ensure that short positions undertaken by a user is covered, market-makers may call for any relevant information/documents from the user, who, in turn, shall be obliged to provide such information/document.
• 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.

5. Settlement and Unwinding