The Reserve Bank of India (RBI) told some lenders they should change the way they account for bond forwards contracts, assets that amount to billions across the industry, according to people familiar with the matter.
During the in-person regular audits in recent weeks, the central bank said bond-forward trades should use Level 3 inputs for valuation, the people said, asking not to be identified because the discussions were private.
Level 3 is used when a trade’s value cannot be easily checked against observable information in the market, and relies on a bank’s own assumptions. The classification can force banks to limit dividend payments and leave them with less regulatory capital, under RBI rules.
Banks widely sell bond forwards to insurers, who use them to lock in future bond prices and protect against swings in interest rates. The notional value of such trades totalled ~1.1 trillion this year, according to clearinghouse data.
Banks have discussed the issue with The Fixed Income Money Market and Derivatives Association of India (FIMMDA) in recent calls and are seeking a resolution, they said.
Lenders have also held informal talks with the Clearing Corporation of India Limited (CCIL) about providing more pricing information to its trade repository, according to people. The clearinghouse has separately begun trials of an electronic bond-forward trading platform that could improve price transparency.
The RBI, FIMMDA and the CCIL did not immediately respond to emails requesting their comments.
