The Reserve Bank of India (RBI) today allowed scheduled commercial banks (SCBs) excluding regional rural banks and local area banks, primary dealers (PDs) and specified All India Financial Institutions (AIFIs) to deal in interest rate derivatives (IRDs) in a phased manner.
In the first phase, such entities can transact only in interest rate futures on notional bonds and treasury bills for the limited purpose of hedging the risk in their underlying investment portfolio.
The RBI in the next phase would consider the possibilities of expanding the scope of hedging to other items of the balance sheet and also permit select entities having adequate capital and appropriate risk management systems to hold trading positions.
The RBI has permitted these institutions to deal in IRDs with a view to enabling regulated entities to manage their exposure to interest rate risks.
In the first phase, the Securities and Exchange Board of India (Sebi) has decided to introduce anonymous order driven system for trading in IRDs on the Bombay Stock Exchange and the National Stock Exchange.
The RBI added that banks and institutions desirous of transacting in IRDs on the stock exchanges should take specific approval from their respective boards covering the products that they may transact in, size/composition of the investment portfolio intended to be hedged, organisational set up to monitor, rebalance, report, account and audit such transactions.
