The Reserve Bank of India has issued Master Direction on Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 vide notification dated September 16, 2021. These Directions shall be applicable to entities permitted to act as market-maker in OTC derivatives in terms of the Governing Directions. These directions shall come into force on January 03, 2022. The key points of the directions include:
- It constitutes a policy for the introduction of new OTC derivative products must comprise of the process for evaluation and approval of new products.
- The due diligence for the introduction of a new product must cover the following aspects of the product:
- Objective
- Type of targeted client and how the product addresses their need(s)
- All risks that a client would potentially face
- Pay-off profile
- Pricing
- Costs and fees, along with analysis of their components, to be incurred by a client; and
- Measures necessary to mitigate any conflict of interest
- The pricing of the product shall be on the basis of the following preferential hierarchy:
- Marking the product (or its components) to market
- Marking the product (or its components) to a model
- Market-makers shall deal only in derivative products permitted in terms of the Governing Directions, which have cash instrument(s) and/or permitted derivative(s) as components.
- Market-makers shall not deal in derivative products containing a derivative instrument as underlying, unless specifically permitted in terms of the Governing Directions, either directly or on a back-to-back basis, which they cannot price independently.
Access the RBI’s Master Directions on Market-makers in OTC Derivatives, 2021, HERE
*Tanvi Singh, Editorial Assistant has reported this brief.