Mumbai: The Reserve Bank of India has allowed commercial banks (excluding regional rural banks) and primary dealers to sell derivative products.

According to the revised guidelines on derivatives by the RBI banks and primary dealers can trade in rupee interest rate derivatives, which includes Interest Rate Swap (IRS), Forward Rate Agreement (FRAs) and Interest Rate Futures, Foreign Currency derivatives and Foreign Currency Forward, which includes Currency Swap and Currency Option.

The RBI defines derivative as an instrument, settled at a future date, whose value is derived from a change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called "underlying"), or a combination of more than one of them.

Banks may undertake interest rate futures transactions to hedge the interest rate risk on their investments in government securities in AFS and HFT portfolios.

All permitted derivative transactions, including roll over, restructuring and novation shall be contracted only at prevailing market rates. The notification further explains, that all risks arising from derivatives exposures should be analysed and documented, both at transaction and portfolio level.