IRDA relax interest rate derivative limits for insurers

Indian insurers can now use interest rate derivatives of over one year to hedge exposures but CSAs will be required to transact, according to updated guidelines from the regulator. 

IRDA informs to insurers that after careful examinations of the comments received, the Authority now withdraws the earlier guidelines and issues fresh guidelines. Insurers are allowed to deal as user with following types of Rupee Interest Rate Derivatives to the extent permitted, and in accordance with these guidelines.

i)                    Forward Rate Agreements (FRAs);

ii)                  Interest Rate Swaps (IRS); and

iii)                Exchange Traded Interest Rate Futures (IRF).

Participants can undertake different types of plain vanilla FRAs/IRS. IRS having explicit/implicit option features are prohibited. It is to be noted that FRAs and IRS are Over-the-counter (OTC) contracts.

CSA will be required to transact these interest rate derivatives so it will require time to be operationally ready to transact CSA. "It takes time to set up a CSA programme and it is not just about negotiating a document. From an operational standpoint you also need to be able to manage the collateral process, including the posting and the reconciliation of collateral. these guidelines are a significant step forward but it will take some time before activity picks up as the players will take time to set up processes,"

"It may take two to three years for insurers to fully utilise interest rate derivatives but we do expect the industry to respond positively to the guidelines and we expect the bigger players in the market, especially those who have joint ventures with international insurers, to be the first to the market,"