The International Financial Services Centres Authority (IFSCA) has released a Consultation Paper on the Reporting and Clearing of Over-the-Counter (OTC) Derivatives Contracts in IFSC, dated July 15, 2025. This move represents a significant regulatory milestone, aiming to enhance the sophistication of financial instruments traded in GIFT-IFSC and complement the thriving exchange-traded derivatives segment.
Background and Rationale
GIFT-IFSC is home to a rapidly developing capital markets ecosystem. Currently, it hosts two Stock Exchanges, two Clearing Corporations, and a Securities Depository, alongside over 140 Capital Market Intermediaries. Trading is settled in US Dollars, and incentives like exemption from capital gains tax and Securities Transaction Tax have made IFSC an attractive destination for global investors.
Until now, the focus has largely been on exchange-traded derivatives. However, with growing global interest and increasing market maturity, stakeholders have urged IFSCA to introduce a comprehensive framework for OTC derivatives—products like total return swaps, forwards, and credit default swaps that are not traded on exchanges but are crucial for bespoke risk management and hedging strategies.
Scope of the Proposal
The Consultation Paper proposes a structured regulatory framework for issuing, reporting, and clearing OTC derivatives contracts booked in IFSC. These contracts must be based on:
Equity or bonds listed in IFSC or on regulated foreign exchanges
Equity and bond derivatives traded on regulated foreign exchanges
Key participants in this market—termed Specified Persons—are initially limited to IFSCA-registered Banking Units and Broker-Dealers, though the paper invites feedback on broadening this scope to include other regulated entities.
Key Regulatory Provisions
Mandatory Central Clearing: To mitigate systemic risk, all OTC derivatives must be cleared through a recognized Clearing Corporation within one business day. However, the paper raises the possibility of allowing bilateral clearing under stricter margin requirements.
Reporting Requirements: Transactions must be reported to a Trade Repository on the day of execution. Additionally, entities that are also SEBI-registered FPIs must report Indian security-based OTC contracts to SEBI.
Capital Requirements: Additional net worth requirements will apply to non-bank entities engaging in OTC derivative trading, with IFSCA seeking feedback on the appropriate threshold.
One-to-One Hedging: Issuers of OTC derivatives must either hold the underlying security or an offsetting position. Netting is not permitted, reinforcing transparency and reducing counterparty exposure.
Prohibition for Indian Residents: These products are intended for offshore use and cannot be offered to persons resident in India unless specifically permitted.
Public Participation Invited
IFSCA is actively seeking feedback on several critical aspects, including:
- Whether other IFSCA-regulated entities should be allowed to issue OTC derivatives
- Appropriate minimum net worth thresholds for non-bank issuers
- Whether bilateral clearing should be allowed, and under what conditions
Conclusion
The proposed framework marks a forward-thinking step in IFSC’s evolution as a global financial hub. It balances innovation with prudential oversight and provides a clear roadmap for building a vibrant, transparent, and well-regulated OTC derivatives market. Stakeholders have until August 5, 2025, to share their views—an opportunity to shape the future of derivatives trading in India