The Reserve Bank of India (RBI) has released draft guidelines for trading in corporate bond index derivatives and Total Return Swaps (TRS).
These steps were announced earlier in the Union Budget by Finance Minister Nirmala Sitharaman to strengthen and deepen India’s corporate bond market.
According to the RBI, a well-functioning 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 the New RBI Draft Guidelines About?
The draft guidelines clearly define who can participate in these derivative products and under what conditions.
They also lay down rules for hedging, eligible assets, and market participants.
This signals the RBI’s plan to expand tools that allow investors and institutions to transfer and manage credit risk more efficiently.
Understanding Total Return Swaps (TRS)
A Total Return Swap is a type of derivative contract.
In this arrangement, one party earns the total return of a bond, which includes interest income and any price movement, without actually owning the bond.
The bank or swap provider keeps the bond on its balance sheet. In return, the buyer of the TRS pays the bank a fixed or floating charge.
Who Can Use TRS Under the Draft Rules?
As per the draft, banks acting as market makers can offer TRS to resident entities, except individuals.
There will be no restriction on the purpose for which these resident entities use TRS.
However, individuals are not allowed to participate in TRS transactions.
For non-residents, TRS will be permitted only for hedging purposes, keeping tighter control on overseas participation.
Asset Rules and Safety Measures
The RBI has set strict conditions on what can be used as the underlying asset.
TRS and futures linked to credit indices must be based on indices that include eligible debt instruments.
These may include money market instruments, rated corporate bonds, and even certain unrated bonds issued by special purpose vehicles created by infrastructure companies.
The floating interest rate used in these contracts must be linked to a benchmark published by an approved financial benchmark administrator.
Settlement and Next Steps
The settlement rules for these credit derivatives will be issued by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) after consultations with market participants.
Once finalised, these guidelines are expected to add depth, liquidity, and flexibility to India’s corporate bond market.
