RBI derivatives regulation: 20/20 in hindsight?

The evolution of the derivatives market in India has not been smooth. With the benefit of hindsight, let us examine regulatory decisions and what can still be done differently.

Giving legal certainty to over-the-counter (OTC) derivatives, through the Reserve Bank of India (RBI) Amendment Act, 2006, has proved invaluable. As apprehended, counterparties (even those that did not initiate litigation) began alleging that OTC derivatives were void as wagers.

The RBI has imposed a few conditions, which on the surface appear unusual. It does not allow counterparties entering into option transactions to be net recipients of premium. The intention clearly is to ensure that counterparties do not enter into derivatives as a treasury operation, but rather for the hedging or transformation of risk only. Yet, at the same time, the RBI has allowed the market to use sophisticated structured products.

H Jayesh is the founder partner and Hoshedar Wadia is a partner at Juris Corp. The firm is a full-service law firm based in Mumbai and specializes in financial transactions including capital markets and securities, banking, corporate restructuring and derivatives.