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Indian insurance companies planning $41 bn trade switch to bond forwards
Insurers are in talks with authorities to convert about Rs 3.5 trn ($41 bn) worth of rates derivative contracts into bond forwards. Such contracts offer investors the opportunity to own the securities
Bloomberg
By Subhadip Sircar and Bhaskar Dutta
India's insurance companies are ready to embrace bond forwards agreements that start trading on Friday, the latest step to enhance the liquidity and sophistication of the nation's $1.3 trillion government debt market.
Insurance companies are in talks with the authorities to convert about Rs 3.5 trillion ($41 billion) worth of rates derivative contracts into bond forwards, people familiar with the matter said. Such contracts offer investors the opportunity to own the securities, rather than just receiving a cash settlement, giving insurers greater certainty in managing interest rate risks.
A key point of discussion between insurers and regulators is the treatment of existing contracts and the complex documentation processes required for the migration, the people said, who declined to be identified as the talks are private. The shift from FRAs, as the rate derivatives are called, will happen gradually, they said.
'Over time, the insurance industry is likely to transition away from FRAs in favor of bond forwards,' said Churchil Bhatt, executive vice president for investments at Kotak Mahindra Life Insurance Co. They provide a hedge against fluctuations in yields and also offer investors the opportunity to get delivery of bonds, he said.
The Reserve Bank of India and the Insurance Regulatory and Development Authority of India didn't respond to emails and calls seeking comment.
Insurer Demand
The bond forward product will cater to the continuing demand for long-term securities from investors like insurance companies, said Gopal Tripathi, head of treasury at Jana Small Finance Bank Ltd.
Banks can undertake long positions without any limits and covered short positions through bond forwards only for hedging, the Reserve Bank of India said in its guidelines.
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