Informist, Friday, Sep 23, 2022

By T. Bijoy Idicheriah and Pratigya Vajpayee

MUMBAI – Some banks have urged the Reserve Bank of India to allow bond forward contracts, a fixed income derivative that is also being increasingly sought out by various categories of bond investors, sources said.

A bond forward is a derivative contract to buy or sell bonds at an agreed-upon price, at a future date. Although such contracts are fairly common in global markets, the RBI has been wary of allowing the product in India ever since the securities scam of 1992 that was executed through forward contracts. Thereafter, the government had banned forwards contracts. 

Indian financial institutions have been working around the situation by replicating the payoffs of bond forwards through other derivative instruments that are permissible in India.

A derivative that has gained popularity over the last two years is a variant of forward rate agreement struck between banks and insurance companies. Under these, banks have been buying long-term gilts with an agreement to sell these to insurers at a later date, on a cash-settled basis.

A few foreign banks, which have been actively entering into such contracts, have requested the RBI to allow bond forwards as a standard product that can be extended to a wider set of participants. According to these banks, the bond-linked forward rate agreements have been customised only for insurance companies, sources said.

Such transactions not only fetch lucrative returns for banks, but also allow insurance companies to lock in a rate of return and in turn commit to a rate of return to their policyholders, just as a bond forward would. However, a bond forward is settled by delivery of securities, while forward rate agreements only entail transfer of cash.

The government is open to bond forwards being allowed in the country, provided the instrument has the central bank’s blessings. The RBI is not averse to the idea either, but is circumspect because of the tainted history associated with the product, sources said.

According to sources, a document on the feasibility of bond forwards has been drawn up internally within the RBI, but it is premature to say if the central bank will move on it anytime soon, or whether the document might eventually be floated as a discussion paper.

There is certainly no reason for the RBI to hurry, given that the bond-linked forward rate agreements are getting the job done for now, sources said. The central bank would also need to discuss bond forwards with insurance companies to better understand the utility for the product.  End

Edited by Arshad Hussain

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

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Informist, Friday, Sep 23, 2022

By T. Bijoy Idicheriah and Pratigya Vajpayee

MUMBAI – Some banks have urged the Reserve Bank of India to allow bond forward contracts, a fixed income derivative that is also being increasingly sought out by various categories of bond investors, sources said.

A bond forward is a derivative contract to buy or sell bonds at an agreed-upon price, at a future date. Although such contracts are fairly common in global markets, the RBI has been wary of allowing the product in India ever since the securities scam of 1992 that was executed through forward contracts. Thereafter, the government had banned forwards contracts. 

Indian financial institutions have been working around the situation by replicating the payoffs of bond forwards through other derivative instruments that are permissible in India.

A derivative that has gained popularity over the last two years is a variant of forward rate agreement struck between banks and insurance companies. Under these, banks have been buying long-term gilts with an agreement to sell these to insurers at a later date, on a cash-settled basis.

A few foreign banks, which have been actively entering into such contracts, have requested the RBI to allow bond forwards as a standard product that can be extended to a wider set of participants. According to these banks, the bond-linked forward rate agreements have been customised only for insurance companies, sources said.

Such transactions not only fetch lucrative returns for banks, but also allow insurance companies to lock in a rate of return and in turn commit to a rate of return to their policyholders, just as a bond forward would. However, a bond forward is settled by delivery of securities, while forward rate agreements only entail transfer of cash.

The government is open to bond forwards being allowed in the country, provided the instrument has the central bank’s blessings. The RBI is not averse to the idea either, but is circumspect because of the tainted history associated with the product, sources said.

According to sources, a document on the feasibility of bond forwards has been drawn up internally within the RBI, but it is premature to say if the central bank will move on it anytime soon, or whether the document might eventually be floated as a discussion paper.

There is certainly no reason for the RBI to hurry, given that the bond-linked forward rate agreements are getting the job done for now, sources said. The central bank would also need to discuss bond forwards with insurance companies to better understand the utility for the product.  End

Edited by Arshad Hussain

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2022. All rights reserved.