RBI Guv Das for greater participation of banks in rupee derivatives market

Currently, domestic banks primarily interact with global market-makers rather than end clients and have yet to establish themselves as significant market-makers globally

Banks should focus on bolstering the participation of Indian entities in the rupee derivatives markets, both domestically and internationally, while maintaining a prudent approach, said Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday.

He said despite some progress, the involvement of domestic banks in the derivative markets remained constrained, with only a limited number of active market-makers.

Das said while Indian banks are gradually increasing their presence in the global markets, their footprint remains relatively small. Currently, domestic banks predominantly interact with global market-makers rather than end-clients, and they are yet to establish themselves as significant market-makers globally.

 

Speaking at the FIMMDA-PDAI Annual Conference on Monday, he said, “Participation of domestic banks in derivative markets remains limited with only a small set of active market-makers. Participation of Indian banks in global markets is growing but it is quite small."

“Going forward, our focus should be on enhancing and widening the participation of Indian players in markets for rupee derivatives, both domestically and offshore, while being prudent,” Das said.

He further said that the journey towards pricing transparency is ongoing, with room for further improvement. Retail customers still do not receive deals comparable to those offered to larger clients. Effective market-making and precise pricing for smaller transactions on the negotiated dealing system-order matching segment (NDS-OM) (a platform for trading) are essential.

Disparities in pricing between small and large customers in forex (FX) markets exceed what operational factors alone can justify.

Commenting that banks may need to do more to facilitate the use of the FX retail platform, Das said RBI continues to see banking channels being used by certain persons or entities to fund activities on unauthorised FX trading platforms. “This warrants enhanced vigilance by the banks,” he said.

The RBI governor highlighted six areas which call for attention. He said that liquidity within over-the-counter (OTC) derivatives markets, particularly in interest rate derivatives, remains concentrated in a few products. This limits the broader economy's ability to hedge efficiently.

Moreover, the market for credit derivatives, crucial for facilitating lower-rated corporate bonds, has not yet gained significant traction.

“I am, however, happy to note that the first credit-default swap (CDS) transaction — after issuance of the revised guidelines that came into effect in May 2022 — was undertaken last week. In many ways, all domestic market participants are yet to fully embrace the new regulatory framework and exploit the opportunities it presents,” he said.

Das said that introduction of bond forwards is being contemplated to empower long-term investors in effectively managing interest rate risks, with draft guidelines issued in December 2023.

“To foster greater efficiency, application programming interfaces (APIs) for reporting trades to NDS-OM and accessing the request for quote (RFQ) dealing mode are being contemplated. Introduction of bond forwards is being considered to enable long-term investors to manage their interest rate risks efficiently. Draft guidelines in this regard were issued in December 2023,” he said.

Bank treasuries need to scale up their dynamism to utilise the opportunities presented in the context of the recent regulatory reforms. This is critical for achieving efficient market intermediation, effective management of financial risks and alignment of financial variables across different segments and markets, he said.

He said efforts are being made to leverage technology for achieving greater efficiency while meeting the objectives of market reforms. The governor cited the example of RBI Retail Direct and FX Retail where the regulator is exploring the use of technological platforms to expand the reach of financial markets.