The Reserve Bank of India (RBI) has released draft guidelines for trading derivatives linked to corporate bond indices and Total Return Swaps (TRS).
These steps were announced earlier by Finance Minister Nirmala Sitharaman in the Union Budget to strengthen and deepen India’s corporate bond market.
According to the RBI, a strong derivatives market can help manage credit risk better, improve liquidity, and make it easier for companies with different credit ratings to raise funds.
What Are These New RBI Guidelines About?
The draft guidelines clearly explain who can participate in these derivative products, how hedging should be done, and what assets can be used as reference.
With these rules, the RBI aims to expand India’s credit risk transfer system and make the corporate bond market more efficient and transparent.
Understanding Total Return Swaps (TRS)
A Total Return Swap is a type of derivatives contract where one party receives the full return of a bond.
This includes interest income and any change in the bond’s price, without actually owning the bond.
In this arrangement, a bank usually holds the bond on its balance sheet.
The buyer of the TRS pays the bank either a fixed or floating charge in return for the bond’s total return.
Who Can Use TRS and Under What Conditions?
As per the draft rules, banks acting as market makers can offer TRS to resident entities, except individuals.
There are no restrictions on the purpose for resident non-individual participants.
For non-residents, TRS will be allowed only for hedging purposes. Individuals are not permitted to participate in TRS at all.
Assets Allowed and Safety Measures
The RBI has also defined what assets can be used for TRS and credit index futures.
These include money market instruments, rated corporate bonds and debentures, and certain unrated bonds issued by special purpose vehicles set up by infrastructure companies.
The floating interest rate for these products must be linked to an official benchmark published by a recognised financial benchmark administrator.
Settlement rules for credit derivatives will be issued separately by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) after consulting market participants.
These guidelines show the RBI’s effort to balance market growth with strict risk controls while making India’s corporate bond market more robust.
