India's central bank has told some lenders they should change how they account for bond forwards contracts, assets that amount to billions of dollars across the industry, according to people familiar with the matter. During in-person regular audits in recent weeks, the Reserve Bank of India 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. Under RBI rules, the classification can force banks to limit dividend payments and leave them with less regulatory capital.
Banks widely sell bond forwards to insurers, which use them to lock in future bond prices and protect against swings in interest rates. The notional value of such trades totaled 1.1 trillion rupees ($11 billion) this year, according to clearinghouse data.
Banks have discussed the issue with the Fixed Income Money Market and Derivatives Association of India in recent calls and are seeking a resolution, the people said. Lenders have also held informal talks with the Clearing Corp. of India Ltd. about providing more pricing information to its trade repository. The clearinghouse has separately begun trials of an electronic bond-forward trading platform that could improve price transparency. The RBI, FIMMDA and the Clearing Corp. did not immediately respond to requests for comment.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing