Reserve Bank of India issued Bond Forwards Directions, 2023 yesterday. Bond forwards mean derivative contracts in which one counterparty (buyer) agrees to buy a specific debt instrument from another counterparty (seller) on a specified future date and at a price determined at the time of the contract. A resident; and a non-resident, who is eligible to invest in Government Securities under the Foreign Exchange Management (Debt Instruments) Regulations, 2019 dated October 17, 2019, as amended from time to time, are allowed to undertake transactions in bond forwards. Transactions in bond forwards shall be undertaken on Central Government dated securities and State Government Securities.

Small Finance Banks, Payment Banks and Regional Rural Banks; Urban Cooperative Banks; Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs); Export Import Bank of India, National Bank for Agriculture and Rural Development, National Housing Bank, Small Industries Development Bank of India and National Bank for Financing Infrastructure and Development; Insurance Companies regulated by Insurance Regulatory and Development Authority of India (IRDAI); Pension Funds regulated by Pension Fund Regulatory and Development Authority (PFRDA); Mutual Funds and Alternative Investment Funds regulated by Securities and Exchange Board of India (SEBI); Foreign Portfolio Investors (FPIs) registered with SEBI; and Resident Companies (other than specified) with net-worth of Rs 500 crore or above as per the latest audited balance sheet are allowed to undertake transactions in bond forwards as users.

Users, other than FPIs, may undertake long positions in bond forwards without any limit.Users, except for resident companies, are permitted to undertake covered short positions. Debt instruments underlying such positions in bond forwards may be used in a repo transaction, if the user is otherwise eligible to undertake repo transactions, subject to the condition that the maturity of the repo should not exceed the maturity of the bond forward. Resident companies shall not undertake any short position in bond forwards. Users shall not undertake any uncovered short position in bond forwards. Market-makers shall ensure that the users undertake only covered short positions in bond forwards. To ensure this, market-makers may call for any relevant information/documents from the eligible users, who, in turn, shall be obliged to provide such information. Users with short positions in bond forwards shall inform the market-makers in case they cease to hold the underlying debt instrument. Users shall exit their short position in bond forwards at the earliest but not later than one week from the date they cease to hold the underlying debt instrument. FPI participation in bond forwards shall be subject to some provisions.

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