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IRDAI Circular on Bond Forwards

IRDAI issued a circular having reference number IRDAI/F&I/INV/CIR/43/03/2025 dated March 10, 2025, titled ‘Exposure to Forward Contracts in Government Securities (Bond Forwards)’ (“Circular”). The key highlights of the Circular are as under:

  • Reference is drawn to para 1.8 a (A) of Chapter 3 of the IRDAI Master Circular on Actuarial, Finance, and Investment Functions of Insurers (2024), which provides that the insurers are permitted to use Rupee Interest Rate Derivatives to hedge interest rate risk, including Forward Rate Agreements (FRAs), Interest Rate Swaps (IRS), and Exchange Traded Interest Rate Futures (IRF). The relevant excerpt of para 1.8 a (A) is as under:

‘Insurers are allowed as user with following types of Rupee Interest Rate Derivatives to the extent permitted, and in accordance with these guidelines.

  • Forward Rate Agreements (FRAs);
  • Interest Rate Swaps (IRS); and
  • Exchange Traded Interest Rate Futures (IRF). Participants can undertake different types of plain vanilla FRAs/IRS. IRS having explicit/implicit options features are prohibited. It is to be noted that FRAs and IRS are Over-the-counter (OTC) contracts.’
  • The Reserve Bank of India (RBI) has issued the Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025, allowing entities classified as non-retail users to undertake transactions in Forward Contracts in Government Securities (Bond Forwards) as users.
  • Clause 13 of Schedule III of the IRDAI (Actuarial, Finance, and Investment Functions of Insurers) Regulations, 2024, provided that the insurers may deal in financial derivatives only as permitted and per guidelines issued by the Competent Authority. The relevant excerpt is as under:

‘13. Dealing in Financial Derivatives:

Every Insurer carrying on the business of life insurance or general insurance or health insurance business may deal in financial derivatives only to the extent permitted and in accordance with the guidelines issued by the Competent Authority in this regard from time to time.’

  • In accordance with clause 13 of Schedule III of the IRDAI (Actuarial, Finance, and Investment Functions of Insurers) Regulations, 2024, insurers are permitted to undertake transactions in Bond Forwards as users for hedging purposes, subject to the following conditions:
    • Insurers shall undertake only long positions in Bond Forwards i.e. buying Bond Forwards.
    • Bond Forwards are not permitted for ULIP business.
    • Insurers shall comply with paras 1.8 a (C to J) of Chapter 3 of the IRDAI Master Circular, covering Permitted Purpose, Regulatory Exposure, Prudential Norms, Documentation, Accounting, Risk Management, Suitability Policy, Governance, and CRO responsibilities for Interest Rate Derivatives.
    • Insurers shall report the transactions in the Bond Forwards on a quarterly basis in line with reports stipulated for Interest Rate Forward Rate Agreements.
    • Insurers shall comply with RBI directions issued for Bond Forwards as amended from time to time.
    • Insurers shall comply with Operational Guidelines issued by Fixed Income Money Market and Dealers Association of India (FIMMDA) with respect to settlement basis and market conventions etc., as amended from time to time.

A copy of the Circular is attached for your ready reference.

Source category: IRDAI

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