The Reserve Bank of India (RBI) on Wednesday issued Rupee Interest Rate Derivatives (Reserve Bank) Directions consolidating and simplifying all previous regulations with a view to protect small and retail participants.
Regulations on interest rate derivatives (IRDs) have so far been issued separately for each product, including for products traded on exchanges.
These regulations were framed with a view to guide the initial evolution of the market through prescriptive requirements.
"Given the evolution of the market, there is now a need to permit flexibility for exchanges and market-makers in the design and innovation of products while ensuring that relatively less informed participants using these derivatives markets are adequately protected," the RBI said while issuing the directions.
The directions consolidate, rationalise and simplify all previous regulations issued on interest rate derivatives, the central bank said.
Exchanges have been provided with the flexibility to design and structure standardised products based on market requirements, it added.
"Similarly, in the over-the-counter (OTC) market, market-makers such as banks have been permitted to offer products tailored to the needs of corporates and other non-retail entities," it added.
At the same time, the directions also seek to protect small and retail participants, such as small and medium enterprises (SMEs), by ensuring that customised products are only offered to large, sophisticated, non-retail users, who are capable of managing attendant risks better.
The RBI has also decided to put in place an internal arrangement to periodically review the structured products offered by market makers.
According to the directions, IRD contracts can be transacted either on recognised stock exchanges or OTC.
Stock exchanges are permitted to offer any standardised IRD product.
"The product design, eligible participants and other details of the IRD product may be finalised by the exchanges.
"Exchanges shall obtain prior approval of the Reserve Bank before introducing any new IRD product or before carrying out modifications to an existing product," it said.
The RBI further said all payments related to IRD transactions of a non-resident may be routed through a rupee account of the non-resident or through a vostro account maintained with a bank in India.
The market-maker should maintain complete details of such transactions.