NISM Series IV · Chapter 8: Regulatory Environment for Exchange Traded IRD

L1 · Foundation

Foundation — Who regulates what, and the statutes behind ETIRD

The seven regulators of the Indian financial market and the dual RBI-SEBI regulation of ETIRD; the authority-and-statute table showing exactly which law covers which activity; the Securities Contracts (Regulation) Act and its definition of securities and derivatives; the SEBI Act and SEBI's powers; and the RBI-SEBI Standing Technical Committee with its six terms of reference.

22 min read · Worth 5% of the paper · Written from pages 274–293 of the official NISM workbook · Updated 18 September 2026

Chapter 8 — Regulatory framework for Exchange Traded Interest Rate Derivatives

Weightage: 5%. A short chapter of pure institutional detail — statute names, committee terms of reference, participation rules and eligibility numbers. Easy marks if you learn the tables.

1. Who regulates what

Regulator	Regulates
SEBI	The securities market AND the commodity derivatives market
Reserve Bank of India (RBI)	The banking sector
Insurance Regulatory and Development Authority of India (IRDAI)	The insurance sector
Pension Fund Regulatory and Development Authority (PFRDA)	The pension fund sector
International Financial Services Centres Authority (IFSCA)	A UNIFIED authority for development and regulation of financial products, services and institutions in the IFSC in India
Ministry of Finance (MOF)	—
Ministry of Corporate Affairs (MCA)	—

In plain words: RBI and SEBI regulate these contracts together, as they do currency derivatives. The exchanges then write the day-to-day rules in their bye-laws.

Within the statutory regulations of RBI and SEBI, the exchanges and clearing corporations frame the OPERATIONAL RULES AND PROCEDURES under their bye-laws.

1.1 The statute table — learn this one properly

Entity	Authority / Statute	Scope
RBI	Government Securities Act 2006	All dealings in government securities
RBI	Reserve Bank of India Act 1934; and Banking Regulation Act 1949	All dealings by RBI-supervised entities; dealing in rupee interest rate derivatives
SEBI	Securities Contracts (Regulation) Act 1956; and SEBI Act 1992	All EXCHANGE-TRADED contracts
Exchanges / Clearing Corporations	Bye-laws of the Exchange and CCs	Operational rules and procedures for trading, clearing, settlement and risk management
Depositories	Depositories Act 1996	Demat accounts

In plain words: RBI covers everything to do with government securities. SEBI covers only the contracts traded on exchanges.

That sentence is the most likely single question from this chapter.

2. Securities Contracts (Regulation) Act, 1956

In plain words: the SCRA gives the Central Government control over stock exchanges, contracts in securities and listing. Its aim is to stop harmful dealings.

It gives the Central Government regulatory jurisdiction over:

(a) Stock exchanges — through a process of recognition and continued supervision.

(b) Contracts in securities.

(c) Listing of securities on stock exchanges.

2.1 What "Securities" includes

Under the SCRA, 1956, "Securities" includes:

Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature, of any incorporated company or a pooled investment vehicle or other body corporate.
Derivatives
Units or any other instrument issued by any Collective Investment Scheme.
Security receipt as defined in the SARFAESI Act, 2002.
Units or any other instrument issued by any pooled investment vehicle.
Units or any other such instrument issued to investors under any mutual fund scheme.
Any certificate or instrument issued to an investor by a SPECIAL PURPOSE DISTINCT ENTITY which possesses any debt or receivable, including mortgage debt, assigned to it, acknowledging beneficial interest of the investor.
Government Securities
Such other instruments as may be declared by the Central Government to be securities.
Rights or interest in securities.
"Electronic Gold Receipt" — an electronic receipt issued on the basis of deposit of underlying physical gold, in accordance with SEBI regulations under section 31.
Zero Coupon Zero Principal Instruments.

⚠️ What "Securities" does NOT include: any unit linked insurance policy, or any scrip, instrument or unit by whatever name called which provides a COMBINED BENEFIT RISK ON THE LIFE of persons AND investment by such persons, issued by an insurer under the Insurance Act, 1938.

In plain words: ULIPs and similar insurance-plus-investment products are not securities under the SCRA.

2.2 Derivatives under the SCRA

With the Securities Laws (Second Amendment) Act, 1999, derivatives were included in the definition of Securities. The term is defined in the SCRA, 1956 as including:

(a) a security derived from a debt instrument, share, loan (whether secured or unsecured), risk instrument or contract for differences or any other form of security.

(b) a contract which derives its value from the prices, or index of prices, of underlying securities.

(c) commodity derivatives.

(d) such other instruments as may be declared by the Central Government to be derivatives.

Section 18A provides that notwithstanding anything contained in any other law, contracts in derivatives shall be LEGAL AND VALID if such contracts are:

Traded on a recognised stock exchange.
Settled on the clearing house of the recognised stock exchange, in accordance with the rules and bye-laws of such exchanges.

In plain words: derivatives have been securities since 1999. Section 18A makes a derivative contract legal and valid if it is traded on a recognised exchange and settled through its clearing house.

(This is the same provision met in Chapter 2 — worth recognising as one idea appearing twice.)

3. The SEBI Act, 1992

The SEBI Act provides for establishment of SEBI with STATUTORY POWERS for:

(a) PROTECTING the interests of investors in securities.

(b) PROMOTING the development of the securities market.

(c) REGULATING the securities market.

Its regulatory jurisdiction extends over corporates (who list or propose to list their securities) in the issuance of capital and transfer of securities, and over all intermediaries and persons associated with the securities market. It can conduct enquiries, audits and inspection of all concerned and ADJUDICATE OFFENCES under the Act, and has powers to register and regulate all market intermediaries and to PENALISE them for violations. SEBI has full autonomy and authority to regulate and develop an orderly securities market.

In plain words: SEBI has three jobs: protect investors, develop the market and regulate it. It can inspect, investigate and penalise all intermediaries.

Its specific powers:

Regulating the business in stock exchanges and any other securities markets.
Registering and regulating the working of stock brokers, authorised persons etc.
Promoting and regulating SELF-REGULATORY ORGANISATIONS associated with securities markets.
Prohibiting FRAUDULENT AND UNFAIR TRADE PRACTICES.
Calling for information from, undertaking inspection, conducting inquiries and audits of stock exchanges, mutual funds, other persons associated with the market, intermediaries and SROs.
Performing such functions and exercising powers under the SCRA, 1956 as may be DELEGATED to it by the Central Government.

Other regulations of high importance in regulating Indian securities markets:

The Securities Contracts (Regulations) Rules, 1957.
Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018.
SEBI (Stock Brokers) Regulations, 2026.
SEBI (Prevention of Insider Trading) Regulations, 2015.
Prevention of Money Laundering Act, 2002.
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003.
SEBI (Custodians) Regulations, 1996
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
SEBI {KYC (Know Your Client) Registration Agency} Regulations, 2011.
SEBI (Intermediaries) Regulations, 2008
SEBI (Depositories & Participants) Regulations, 2018.

4. The RBI-SEBI Standing Technical Committee

The sequence of events that created the committee:

⚠️ On April 20, 2007, RBI issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market, to enable entities to manage volatility in the currency market. At the same time RBI set up an INTERNAL WORKING GROUP to explore the advantages of introducing currency futures.
The Report of the Internal Working Group, submitted in APRIL 2008, recommended the introduction of exchange traded CURRENCY FUTURES.
⚠️ In a JOINT MEETING of RBI and SEBI on FEBRUARY 28, 2008, it was decided that an RBI-SEBI STANDING TECHNICAL COMMITTEE ON EXCHANGE TRADED CURRENCY AND INTEREST RATE DERIVATIVES would be constituted. To begin with, the Committee would evolve norms and oversee the implementation of exchange traded CURRENCY FUTURES.

4.1 The six terms of reference

To COORDINATE the regulatory roles of RBI and SEBI in regard to trading of Currency and Interest Rate Futures on the exchanges.
To suggest the ELIGIBILITY NORMS for existing and new exchanges for currency and interest rate futures trading.
To suggest ELIGIBILITY CRITERIA FOR THE MEMBERS of such exchanges.
To review PRODUCT DESIGN, MARGIN REQUIREMENTS and other risk mitigation measures ON AN ON-GOING BASIS.
To suggest SURVEILLANCE MECHANISM and DISSEMINATION OF MARKET INFORMATION.
To consider MICROSTRUCTURE ISSUES, in the overall interest of FINANCIAL STABILITY.

4.2 The Committee's report on Interest Rate Futures

⚠️ The committee submitted its report on Interest Rate Futures on JUNE 17, 2009. In operationalising the products, it deliberated upon the recommendations of the Technical Advisory Committee Report on Interest Rate Futures of AUGUST 2008.

What the report provided and recommended:

Product design, margins and position limits for 10-Year Notional Coupon bearing GOI Security Futures.
⚠️ That interest rate derivative contracts shall be traded on the CURRENCY DERIVATIVE SEGMENT of a recognised stock exchange.
⚠️ That members registered by SEBI for trading in the Currency/Equity Derivative Segment shall be eligible to trade in Interest Rate Derivatives also, subject to meeting the BALANCE SHEET NET WORTH requirement of Rs 1 CRORE for a TRADING MEMBER and Rs 10 CRORE for a CLEARING MEMBER.

In plain words: the committee's June 2009 report set the design of 10-year GOI bond futures. It put interest rate derivatives in the currency derivatives segment. Existing currency or equity derivatives members could trade them with a net worth of Rs 1 crore (trading member) or Rs 10 crore (clearing member).

Think of it like this

Two regulators, two jurisdictions — the building and the shop inside it

A municipal corporation regulates the building — its structure, its safety, its very existence. A separate licensing authority regulates the shop that operates on the third floor — its trade licence, its weights and measures, its billing.

The building authority's writ is broader and more fundamental; the shop licensor's is narrower but real within its patch.

That is exactly how the workbook describes the RBI–SEBI division: "RBI's role in regulation of government securities is PRIMARY AND FUNDAMENTAL and covers ALL activities, while that of SEBI is LIMITED TO THE EXCHANGE-TRADED CONTRACTS on them."

RBI owns the Government Securities Act 2006 for all dealings in G-secs, and the RBI Act 1934 and Banking Regulation Act 1949 for RBI-supervised entities and rupee interest rate derivatives. SEBI owns the SCRA 1956 and SEBI Act 1992 for all exchange-traded contracts. The exchange's own bye-laws then supply the day-to-day operating rules — the shop's internal procedures.

Why banks may trade but not broke — the wholesaler with no retail counter

A pharmaceutical wholesaler can buy and stock medicines for its own account. It cannot open a counter and dispense to walk-in patients — that requires a chemist's licence, a different set of obligations towards a different kind of person.

Banks in ETIRD sit in exactly that position. "Banks are permitted to participate in IRD both for the purpose of hedging the risk in the underlying investment portfolio and also to take trading position. However, BANKS ARE NOT ALLOWED TO UNDERTAKE TRANSACTIONS IN IRFs ON BEHALF OF CLIENTS."

And the same restriction applies to stand-alone Primary Dealers, who may deal "for both hedging and trading on own account and NOT on client's account."

Note the odd shape this creates: a bank may become a trading and clearing member of the currency derivatives segment "on their own account AND on behalf of their clients" if it meets the prudential tests — net worth Rs 500 crore, CRAR 10%, net NPA not above 3%, net profit for three years — but in ETIRD specifically it may act only on its own account. Membership and permitted activity are two different questions.

Insurers may only buy an umbrella, never sell one

An insurance company exists to absorb other people's risk. The last thing a regulator wants is for it to go and take on market risk with the premium float. So IRDAI confines it to one direction.

"Insurance companies are allowed to participate in IRF ONLY, and it is only for LONG HEDGE." Not options — futures only. Not short hedges — long only.

And the permitted purposes are all forecasted transactions, all of them anticipated inflows the insurer will need to invest at future rates:

Reinvestment of maturity proceeds of existing fixed income investments
Investment of interest income receivable
Expected policy premium income receivable on contracts already underwritten

Every one of these is money arriving later, exposed to rates having fallen by then — which is precisely the risk a long hedge addresses. The workbook adds the governing sentence: "the overriding principle... is that they must be used for HEDGING PURPOSES ONLY to reduce the interest rate risk in the company. The company MUST BE ABLE TO DEMONSTRATE that this principle is adhered to."

Base Minimum Capital — the security deposit you never get to spend

When you rent a shop, you pay a security deposit. It is not stock, not working capital, not something you can trade with. It simply sits there so the landlord has recourse if something goes wrong.

Base Minimum Capital is exactly that: "the deposit given by the member of the exchange AGAINST WHICH NO EXPOSURE FOR TRADES IS ALLOWED." It is "meant to meet contingencies in any segment of the Exchange."

The amounts scale with how much can go wrong:

Activity	BMC
Proprietary only, no algo	Rs 10 lakh
Client only, no algo	Rs 15 lakh
Both proprietary and client, no algo	Rs 25 lakh
All brokers WITH algo	Rs 50 lakh

Note that client business costs more than proprietary business, and that algo trading doubles the top slab — the deposit tracks the risk the member brings to the system. And like a landlord's deposit, at least 50% must be in cash and cash equivalents, because a deposit you cannot realise quickly is no deposit at all.

FIMMDA and FBIL — the trade body and the scorekeeper

In any sport there is an association of the clubs that frames playing conventions and speaks to the authorities, and a separate scoring body whose published numbers everyone must accept.

FIMMDA is the association: an association of Scheduled Commercial Banks, Financial Institutions, Primary Dealers and Insurance Companies, which functions as the principal interface with regulators, standardises market practices, publishes a Handbook of Market Practices and a Code of Conduct for Derivatives Transactions, and — in ETIRD — is the body exchanges must consult when deciding which GOI security underlies a bond derivative.

FBIL is the scorekeeper: jointly owned by FIMMDA, FEDAI and IBA, formed in December 2014, it administers the benchmarks — the overnight interbank borrowing rate, T-Bill rates, MIBOR — and now handles the valuation of G-secs and SDLs, which FIMMDA previously did.

You have already met both throughout this workbook without perhaps noticing: every time a settlement price falls back on the "FIMMDA/FBIL price" because fewer than five trades occurred, this is who is being relied on.

Key terms in this chapter

AD Category-I bank membership: Banks authorised under section 10 of FEMA may become trading and clearing members of the currency derivatives segment if they meet net worth of Rs 500 crore, CRAR of 10%, net NPA within 3% and three years of net profit.
All India Financial Institutions (AIFIs): Named in the Directions as Exim Bank, NABARD, NHB and SIDBI — four institutions that qualify automatically as non-retail users.
Authorised person liability: An authorised person acts as agent of the stock broker under a written agreement approved by the exchange, and the trading member is responsible for all his acts of omission and commission as if they were his own.
Base Minimum Capital (BMC): A deposit given by a member against which no trading exposure is allowed, meant to meet contingencies. Rs 10 lakh for proprietary-only, Rs 15 lakh for client-only, Rs 25 lakh for both, and Rs 50 lakh for any broker using algo.
Centralised treasury facility: The permission for a parent, group company or centralised treasury to transact IRDs on behalf of wholly owned subsidiaries or group companies — available only where it meets the non-retail user criteria.
Certification requirement for members: At all times either the proprietor, one designated director or partner, or the compliance officer must meet SEBI or exchange certification requirements — a condition of continued admittance to membership.
Definition of "securities": Under the SCRA it covers shares, bonds and debentures, derivatives, collective investment scheme units, security receipts, pooled vehicle units, mutual fund units, SPDE certificates, government securities, rights in securities, electronic gold receipts and zero coupon zero principal instruments — but never a unit linked insurance policy.
Designated partners and directors: At least two individuals a firm or company must nominate to manage day-to-day trading operations, each at least 21 years old, HSC qualified, with a minimum of two years' securities-related experience.
Disqualification from membership: Bars including adjudged bankruptcy even after discharge, compounding with creditors, conviction for fraud or dishonesty, engagement in a non-securities business unless severed, and expulsion or debarment by any exchange or regulator.
Dominant Promoter Group (DPG): The controlling group a partnership, LLP or company applicant must identify at the time of application. Any change in its shareholding or sharing interest needs prior permission of the exchange or SEBI.
Electronic Trading Platform (ETP): A screen-based venue that is nonetheless regulated as OTC, because OTC covers all transactions done outside a recognised stock exchange.
FBIL: Financial Benchmarks India Private Ltd., owned jointly by FIMMDA, FEDAI and IBA and formed in December 2014, which develops and administers money market, government securities and foreign exchange benchmarks.
FIMMDA: The Fixed Income Money Market and Derivatives Association of India — a voluntary body of banks, financial institutions, primary dealers and insurers that interfaces with regulators, standardises market practice and is RBI-mandated for bond valuation.
FIMMDA Code of Conduct for Derivatives Transactions: Guidelines for members and market participants, especially where end users are involved, covering suitability and appropriateness, reasonability of rates, avoidance of trades that shift gains or losses between periods, and new product introduction.
Financial Benchmark Administrator (FBA): The category of body whose published benchmark may be used as a floating rate in OTC interest rate derivatives — the alternative being a rate approved by FIMMDA as transparent, objective and arm's length.
Fit and proper person: The test under Schedule II of the SEBI (Intermediaries) Regulations, 2008 — integrity, reputation and character; absence of convictions and restraint orders; competence including solvency and net worth; and absence of wilful defaulter status.
Government Securities Act, 2006: The statute under which RBI regulates all dealings in government securities — the broadest of the authorities in the ETIRD regulatory map.
Imperfect hedging: Hedging where the interest rate future has a different underlying security from the position being hedged. For mutual funds it may be exempted from gross exposure up to 20% of net assets, on strict conditions.
Joint regulation of ETIRD: Exchange traded interest rate derivatives are regulated by RBI and SEBI together, exactly as currency derivatives are. RBI's writ over government securities is primary and covers all activities; SEBI's is limited to the exchange-traded contracts on them.
Long hedge restriction on insurers: IRDAI permits insurance companies to use interest rate futures only, and only for long hedges of forecast inflows — reinvestment of maturity proceeds, interest income receivable, and premium income on contracts already underwritten.
Net worth versus deposit: A member's net worth requirement is reckoned across all segments and exchanges as a single figure, while the deposit requirement is calculated separately for each segment.
Non-retail user: RBI-regulated entities, insurance companies, mutual and pension funds and other collective investment vehicles, the four All India Financial Institutions, and companies with net worth of Rs 5 billion or above.
Primary Dealer: Introduced by RBI in 1995 to strengthen G-Sec market infrastructure, develop underwriting and market making, improve secondary trading and serve as a conduit for open market operations. In IRD it may hedge and trade only on its own account.
Prior approval for IRD products: Exchanges may design and offer any standardised IRD product, but must obtain RBI's prior approval before introducing a new one or modifying an existing one — and must submit the contract proposal to SEBI.
RBI-SEBI Standing Technical Committee: Constituted following a joint RBI-SEBI meeting on 28 February 2008 to coordinate the two regulators' roles in currency and interest rate futures, suggest eligibility norms, review product design and margins, and consider microstructure issues.
Regulated entity: Any person other than an individual or HUF whose activities are regulated by RBI, SEBI, IRDAI, PFRDA, NHB or NABARD. Every such entity needs its own regulator's permission before participating in IRDs.
Report on Interest Rate Futures (June 2009): The Standing Technical Committee report that set product design, margins and position limits for 10-year notional GOI security futures, placed IRD in the currency derivatives segment, and fixed net worth at Rs 1 crore for a trading member and Rs 10 crore for a clearing member.
Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019: RBI's notification of 26 June 2019 superseding earlier IRD directions, covering transactions on recognised stock exchanges and over the counter, including on electronic trading platforms.
SEBI Act, 1992: Establishes SEBI with statutory powers to protect investors, promote the development of the securities market and regulate it — including registering intermediaries, prohibiting fraudulent practices and adjudicating offences.
Section 18A, SCRA: Makes derivative contracts legal and valid provided they are traded on a recognised stock exchange and settled on its clearing house per its rules and bye-laws.
Section 45W of the RBI Act, 1934: The provision under which RBI issued the draft Master Direction on Rupee Interest Rate Derivatives, 2025, in June 2025 to update the 2019 framework.
Secured Overnight Rupee Rate (SORR): FBIL's trade-based benchmark derived from actual repo transactions, introduced to replace MIBOR for better transparency and alignment with global standards.
Securities Contracts (Regulation) Act, 1956: Provides direct and indirect control over securities trading and stock exchanges, aiming to prevent undesirable transactions. It gives the Central Government jurisdiction over exchanges, contracts in securities and listing.
Single registration under the 2026 Regulations: A broker now receives one SEBI certificate of registration irrespective of exchanges, clearing corporations or segments — though approval of each concerned exchange or clearing corporation is still needed to operate there.
Suitability and Appropriateness policy: The RBI framework of April 2007 under the Comprehensive Guidelines on Derivatives, to which all bank derivative contracts are subject, and one of the four issues addressed by FIMMDA's derivatives code of conduct.
The 0.9 correlation condition: A mutual fund's imperfect hedge qualifies for the gross exposure exemption only if the correlation between portfolio and future is at least 0.9 at initiation, with any later deviation rebalanced within 5 working days.
The highest-BMC rule: A member registered on more than one segment of the same exchange pays the highest BMC across those segments rather than the sum, with at least half in cash and cash equivalents.

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Original explanatory writing based on the official NISM workbook for Series IV, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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