The Reserve Bank of India is likely to announce a roadmap for banks to participate in the derivatives segment in the equity, commodities and fixed income ( bonds) markets for better risk management.
According to sources, recommendations of several internal committees set up by the RBI may figure in the annual credit policy to be announced this week.
In the commodities market, the RBI is likely to put a ceiling of 5-10 per cent of the total investment portfolio for banks to trade in futures.
While the RBI's group on commodities has also recommended legalising warehouse receipts as a trading instrument, the RBI has already forwarded its approval to the government for amending section 6 of the Banking Regulation Act to allow banks to trade in commodities. At present banks can only trade in bullion.
In line with banks' investing in the equity market, the RBI committee on the stock markets too has suggested that the Banking Regulation Act be amended to allow banks to trade in equity derivatives.
According to banking industry sources, some banks have also approached the RBI to allow them to become brokers in the equity market. At present, banks can only trade in the stock market for their own positions but not on behalf of others.
In the fixed income market, the RBI is likely to take a call on allowing banks to trade in interest rate futures. This market has not taken off owing to the low volumes.
Right now, banks can only buy interest rate futures for hedging their portfolio, though primary dealers are allowed to trade in futures. But PDs, given their small net worth, are unable to participate in futures a big way.
Interest rate options and credit derivatives may also find a place in the policy announcement.
If the RBI clears the idea of credit derivatives, it will give a boost to the corporate bonds market.
In response to the demand of the banks to clarify the legal status of over-the-counter derivatives which are not traded on the exchanges, the RBI proposes to recommend to the Institute of Chartered Institute of India that it frame uniform accounting norms for banks on their derivative exposure.
The RBI wants the banks to value their derivative exposure daily, based on the market price and account for the risk . At present each bank has its own set of accounting norms. Foreign banks have much larger off balance sheet items , including derivatives, than balance sheet exposure, said a source.
