Guidelines on Forward Contracts in Government Securities (2025)

Posted On - 8 March, 2025 • By - Shraddha Mane

Introduction

The Reserve Bank of India (RBI) has issued new regulatory guidelines for Forward Contracts in Government Securities, effective May 2, 2025. These guidelines regulate bond forward transactions, where parties agree to buy or sell a government security at a predetermined price on a future date.

Legal Framework & Applicability

Issued under Sections 45W and 45U of the RBI Act, 1934, these guidelines regulate Over The Counter bond forward transactions in India, excluding treasury bills. The rules apply to transactions outside stock exchanges, including those on Electronic Trading Platforms (ETPs).

Key Definitions

  1. A bond forward: is a contract where one party agrees to buy a government security at a future date for a fixed price.
  2. A market-maker: refers to financial institutions that provide continuous buy and sell prices to maintain market liquidity.
  3. A covered short: is when a trader sells a bond forward while holding the underlying security, whereas an uncovered short is when the trader does not own the security.
  4. Settlement methods: include physical settlement, where the bond is delivered, and cash settlement, where only the price difference is paid.
  5. Over-the-Counter (OTC): a market where bond forward transactions are undertaken in any manner other than on exchanges and shall include those undertaken on electronic trading platforms (ETPs).

Eligible Participants

The guidelines permit both residents and eligible non-residents to participate. Non-residents must comply with the Foreign Exchange Management (Debt Instruments) Regulations, 2019. Market-makers include Scheduled Commercial Banks (excluding Small Finance Banks, Payment Banks, Local Area Banks, and Regional Rural Banks) and Standalone Primary Dealers (SPDs). Market-makers can take long and covered short positions, while uncovered short sales are permitted only within specific limits. Other market participants, categorized as non-retail users under the Rupee Interest Rate Derivatives Directions, 2019, can take long positions freely but must hedge short positions.

Trading, Settlement & Risk Management

Bond forwards can be physically settled or cash settled through Clearing Corporation of India Ltd. (CCIL). Short positions must be covered within a specific timeframe. Market participants can exit contracts before maturity through unwinding (closing with the same counterparty) or novation (transferring the contract to another participant).

Market Regulations & Reporting Requirements

Bond forward trading follows OTC Rupee Interest Rate Derivative market hours. Market-makers must report all transactions (including settlements and short positions) to the Trade Repository (TR) of CCIL before the close of business each day. Participants must reconcile records and conduct regular audits to ensure compliance.

Compliance & Penal Provisions

Participants must follow prudential norms, including capital adequacy, exposure limits, and accounting standards. The RBI may request transaction details and publish anonymized market data. Violators may face a temporary trading ban (up to one month), and their names may be publicly disclosed.

Conclusion

The RBI Forward Contracts in Government Securities Directions, 2025 establish a structured, transparent, and risk-controlled framework for bond forwards. These regulations aim to protect investors, strengthen financial markets, and ensure responsible trading in India’s government securities market.