The Insurance Regulatory and Development Authority of India (IRDAI) has issued a circular permitting insurers to undertake transactions in Bond Forwards to hedge interest rate risks. This decision aligns with the Reserve Bank of India’s recent directions on Forward Contracts in Government Securities. Insurers may only take long positions in Bond Forwards and are restricted from using these instruments for Unit Linked Insurance Plan (ULIP) business. Compliance is mandated with specific provisions of the IRDAI Master Circular on Actuarial, Finance, and Investment Functions, including regulatory exposure norms, risk management policies, and governance standards. Additionally, insurers must adhere to RBI guidelines, FIMMDA operational standards, and submit quarterly transaction reports. The circular aims to broaden risk management options for insurers while ensuring regulatory compliance.
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
Circular Ref: IRDAI/F&I/INV/CIR/43/03/2025 Dated: 10th March, 2025
To,
Life, General and Health Insurers
Sub: Exposure to Forward Contracts in Government Securities (Bond Forwards).
1. As per para 1.8 a (A) of Chapter 3 of the Master Circular on IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations,2024 insurers are allowed as users with following types of Rupee Interest Rate Derives to hedge the interest rate risk:
i. Forward Rate Agreements (FRAs);
ii. Interest Rate Swaps (IRS) and
iii. Exchange Traded Interest Rate Futures (IRF).
2. RBI has recently issued Reserve Bank of India (Forward Contracts in Government Securities) Directions,2025. Under these directions, it is specified that any entity, eligible to be classified as a non-retail user shall be eligible to undertake transactions in Forward Contracts in Government Securities (Bond Forwards) as a user.
3. In view of the above directions and considering insurers requests for introduction of Bond Forwards, insurers are hereby permitted under clause 13 of Schedule III of IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations,2024 to undertake transactions in Bond Forwards as users for hedging purpose subject to the following conditions:
i. Insurers shall undertake only long positions in Bond Forwards i.e. buying Bond Forwards;
ii. Bond Forwards are not permitted for ULIP business;
iii. Insurers shall comply with provisions of paras 1.8 a (C to J) of Chapter 3 of the Master Circular on IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations,2024 i.e conditions of Permitted Purpose, Regulatory Exposure and Prudential norms, Documentation Requirements, Accounting, Internal Risk Management Policy & Process, Suitability and Appropriateness Policy, Corporate Governance and CRO role & responsibilities prescribed for Interest Rate Derivatives;
iv. Insurers shall report the transactions in the Bond Forwards on quarterly basis in line with reports stipulated for Interest Rate Forward Rate Agreements.
v. Insurers shall comply with RBI directions issued for Bond Forwards as amended from time to time;
vi. Insurers shall comply with Operational Guidelines issued by Fixed Income Money Market and Dealers Association of India(FIMMDA) with respect to settlement basis and market conventions etc., as amended from time to time.
This circular is issued with approval of the Competent Authority.
Sd./-
(Ammu Venkataramana)
(General Manager)
