The Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025, issued on February 21, 2025, provides a framework for trading forward contracts in government securities. These guidelines are applicable to forward contracts in government securities undertaken in the OTC Market in India, which shall come into effect on May 2, 2025.
What are Forward Contracts in Government Securities?
Forward contract also referred to as bond forwards is a financial agreement where two parties commit to buying or selling a government security on a specified future date and at a price determined at the time of the contract. This helps market participants hedge against interest rate risks and manage their investment portfolios efficiently.
Forward contracts in government securities can be settled in two ways:
Physical settlement:
Actual government security is delivered
Cash settlement:
Contract is settled based on price differences without delivering the security
Who Can Participate?
RBI has categorized participants into following groups:
Market-Makers (Liquidity Providers)
Entities allowed to trade actively and provide liquidity:
- Scheduled Commercial Banks (excluding Small Finance Banks, Payment Banks, Local Area Banks, and Regional Rural Banks)
- Standalone Primary Dealers
Users (Institutional Participants)
Users includes non-retail investors such as:
- Insurance companies
- Pension funds
- Mutual funds
- All India Financial Institutions (AIFIs), viz., Exim Bank, NABARD, NHB and Small Industries Development Bank of India (SIDBI)
- Companies/entities with net-worth of ₹500 crore or above
- Non-residents other than individuals.
Eligible Market Participants
Following people can enter into bond forward transactions (subject to the limits set by these directions):
- Residents of India
- Non-residents who are allowed to invest in Indian Government Securities under the Foreign Exchange Management (Debt Instruments) Regulations, 2019 (and any updates to those rules) namely:
- Foreign Portfolio Investors (FPIs)
- Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs)
- Foreign Central Banks and Sovereign Wealth Funds
- Multilateral Financial Institutions
How Will These Contracts Be Settled?
Physically settled transactions:
Must be cleared through Clearing Corporation of India Ltd. (CCIL) or any RBI-approved clearing agency.
Cash-settled transactions:
Can be settled bilaterally (between two parties) or via approved clearing arrangements.
Exiting a position:
Participants can unwind (cancel) or novate (transfer) positions as per specified rules.
Reporting Requirements
- Who Needs to Report?
- Market-makers (entities facilitating bond forward transactions)
- Users (buyers/sellers) do not need to report if their trades are settled through CCIL (Clearing Corporation of India Ltd.), but the market-maker or clearing member handling the settlement must report on their behalf.
- What Needs to Be Reported?
Market-makers must submit details of:- All bond forward transactions done during the day
- Counterparty details (who they traded with)
- The underlying government security being traded
- Settlement type – Whether the contract will be cash-settled or physically settled (actual delivery of bonds)
- If a short position (selling bonds without owning them) is covered or uncovered
- Also report the following:
- Unwinding (early closing of contracts)
- Novation (replacing an old contract with a new one)
- Bilateral settlements (direct settlements between two parties)
- Settlement defaults (when a party fails to complete a trade).
- Who Needs to Report?
Reports must be submitted to the Trade Repository (TR) of CCIL before it closes for the day. Format for reporting will be decided by CCIL with RBI’s approval.
Where and When to Report?
- Increased Transparency – RBI’s reporting guidelines ensure better regulation and monitoring of forward contract trades.
- Market Development – Enhances the liquidity and efficiency of India’s bond market.
- Better Risk Management – Helps long-term investors like insurance companies and pension funds protect themselves from interest rate fluctuations.
Conclusion
The RBI (Forward Contracts in Government Securities) Directions, 2025 mark a major step in developing India’s financial markets. By allowing forward contracts in government securities, the RBI is giving investors a powerful tool to manage risks, improve market liquidity, and make the bond market more dynamic and resilient.
Disclaimer
The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.
