Business

SCBs, PDs allowed to deal in interest rate derivatives

MUMBAI APRIL 24 . The Reserve Bank of India has permitted scheduled commercial banks (SCBs), primary dealers and specified all India financial institutions (FIs) to deal in interest rate derivatives (IRDs) in a phased manner to enable them to manage their exposure to interest rate risks.

In the first phase, such entities can transact only in interest rate futures on notional bonds and treasury bills (T-Bills) for the limited purpose of hedging the risk in their underlying investment portfolio, the RBI said in a notification here today.

Allowing transactions in a wider range of products, as also market making would be considered in the next stage on the basis of the experience gained, it added.

Following the recommendations of the working group on rupee derivatives, the Securities and Exchange Board of India decided to introduce an anonymous order driven system for trading in IRDs with effect from April 28 on the Bombay and National stock exchanges.

The RBI, however, cautioned that while derivatives present immense opportunity for mitigating the market risks inherent in balance sheet, it could also expose one to substantial losses on account of inadequate understanding of the product, absence of proper monitoring and poor risk control measures.

SCBs and FIs desirous of transacting in IRDs should take specific approval from their board on — products that they may transact, size or composition of investment portfolio intended to be hedged, organisational set-up to monitor, rebalance, report, account and audit of such transactions.

PTI

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