Mumbai: The Reserve Bank of India has released draft directions on introduction of bond forwards in government securities, a move that will enable market participants, particularly long-term investors, to manage cash flows and interest rate risk. Comments on the draft directions can be sent by banks, market participants and investors to the Reserve Bank of India by January 25.
A bond forward refers to a derivative contract in which one counterparty agrees to purchase a specific debt instrument from another counterparty on a particular future date and at a price decided at the time the contract is struck.
The norms will apply to transactions in bond forwards conducted in the over-the-counter market.
Banks, except for small finance banks, payment banks, local area banks and regional rural banks will act as market-makers in bond forwards along with standalone primary dealers. At least one of the parties in a bond forwards transaction must be a market-maker or a central counterparty authorised by the Reserve Bank of India (RBI).
The financial institutions that are eligible to undertake bond forwards as users are small finance banks, payment banks, regional rural banks and urban cooperative banks.
Non-banking finance companies and All India Financial Institutions are also eligible users. Insurance companies, pension funds, mutual funds, alternative investment funds, foreign portfolio investors and resident investors with net worth of ₹500 crore and above are also eligible users.
