Banks told to furnish data on derivatives

Concerned over banks' unhedged positions in the market, the Reserve Bank of India has sought data from banks on their derivatives exposure.

The central bank has sought data from the fixed income market on banks' domestic as well as foreign exchange positions in segments like currency rupee options, interest rate swaps and the like.

Normally, commercial banks on their own report to the RBI their positions at regular intervals.

Market sources said the unusual move was part of the risk management measure adopted by the RBI to assess the total unhedged position in the market.

"The central bank perceives risk from some foreign banks, which hedge their positions in the derivative market back-to-back with their group entities abroad without showing the risk on their India books," said a senior banker. This gives rise to unhedged risk for the bank as well as the market.

Others felt the RBI was surveying the market to ascertain the kind of risks the market players were exposed to in their derivatives operations before it comes out with the roadmap for derivatives instrument for the fixed income market.

Sources close to RBI said derivatives exposure poses a systemic risk as volumes have grown substantially over the years. With the interest rate outlook uncertain and currency view skeptical, both corporate and banks have used derivatives -- especially overnight swaps to hedge their books.

Besides, in order to earn higher returns from lending through bonds, most foreign banks subscribe to these instruments and offload them in the secondary market.

However, with the corporate bond market turning illiquid, these exposures were swapped with less savvy public sector banks.

Daily volumes of overnight swap rates and Mumbai interbank forward rate have shot up to almost Rs 2000 crore (Rs 20 billion) now from lows of Rs 500 crore (Rs 5 billion) in 2003-04.

Under lens

• The RBI has sought details on banks' domestic as well as foreign exchange positions
• Move seen as part of the risk management measure adopted by the RBI to assess the unhedged position in the market
• RBI sees derivatives exposure as a systemic risk, with volumes increasing substantially over the years