Unlocking OTC Derivatives at GIFT City IFSC: A Simple, Detailed Guide

INTRODUCTION

The financial landscape in India is rapidly evolving, and GIFT City’s International Financial Services Centre (IFSC) is at the forefront. One of the latest moves to strengthen this position is a new regulatory framework for reporting and clearing Over-The-Counter (OTC) derivatives.

This blog breaks down the consultation paper’s proposals, making it easy to understand—even if you’re new to finance or GIFT City.

A futuristic skyline inspired by GIFT City is overlaid with digital symbols of finance, illustrating the dynamic infrastructure of a modern fintech hub.

What Are OTC Derivatives, and Why Do They Matter?

OTC derivatives are privately negotiated contracts (like swaps or forwards) traded directly between two parties, not on an exchange. They help investors and companies manage risks, tailor investment strategies, or gain unique market exposure.

Why Focus on OTC Derivatives at GIFT City IFSC?

· Diversifies financial products beyond just exchange-traded instruments.

· Attracts sophisticated global investors.

· Complements existing exchange-based derivatives, expanding market choices.

The GIFT City IFSC Capital Market Ecosystem

Who's Who?

· Market Infrastructure Institutions (MIIs):

· Stock Exchanges, Clearing Corporations, Depository.

· Capital Market Intermediaries (CMIs):

· Broker-Dealers, Clearing Members, Depository Participants, Custodians, Advisors, Investment Bankers, Trustees, Distributors.

What Can You Currently Trade?

· Equity Index Derivatives

· Currency & Commodity Derivatives

· Bonds (Green, Corporate, Masala, Sustainable, etc.)

· Depository Receipts

Bonus: Trading and settlement happen in US Dollars; non-residents pay no capital gains or securities transaction tax on listed securities.

How OTC Derivative Products Evolved in IFSC

· Initially: Only IFSC Banking Units (IBUs) could deal in OTC derivatives (limited to FX, interest rates, and credit).

· ODIs: IBUs registered as Foreign Portfolio Investors (FPIs) used to issue Offshore Derivative Instruments (ODIs) referencing Indian bonds or government securities.

· Recent Change: Non-bank entities in GIFT IFSC may now issue derivatives against Indian securities, following SEBI and IFSCA rules.

Proposed New Regulatory Framework: What’s Changing?

Core Proposals

· Broaden the Allowed OTC Derivatives:

· Include forwards, total return swaps, etc.

· Link contracts to equities and bonds listed either in the IFSC or major foreign exchanges.

· Expand to index, equity, and bond derivatives from regulated foreign exchanges.

Eligible Issuers:

· Only IBUs and Broker-Dealers (registered with IFSCA) may issue at first.

· Input sought on expanding to other qualified IFSC entities.

Illustration: Imagine a BNP Paribas IBU in GIFT City and an international investment firm entering a swap referencing bonds listed on NASDAQ—the new rules give them a safe, regulated pathway to do so.

Key Definitions (Simplified)

Term	Meaning
OTC Derivative Contract	Privately-negotiated, not traded on exchanges
IFSC Listed Securities	Securities listed on an IFSC-recognized Stock Exchange
Credit Derivatives	OTC contracts based on bonds (IFSC, foreign exchange, or FPIs in India)
Equity Derivatives	OTC contracts linked to listed equities or equity/bond derivatives on IFSC/foreign exchange
Specified Person	Registered IBUs, Broker-Dealers, or other IFSCA-permitted entities
Trade Repository	Central database where all OTC contracts are reported
Centrally Cleared	Transaction processed by a regulated central clearing house for risk management

Who Can Issue or Participate in These Contracts?

· Only a Specified Person (currently IBU or Broker-Dealer) may issue.

· The contract must reference securities listed in IFSC or on major foreign exchanges.

· At least one party to the contract must be an IFSC-based Specified Person.

· Indian residents are excluded from these offerings unless specially permitted.

How Will It Work? Step-by-Step

1. Issuance & Documentation

· A qualified IBU or broker-dealer issues an OTC contract referencing an approved security.

· The issuer must hold or have an offsetting position in the underlying security (no synthetic or naked exposure).

2. No Netting Allowed

· Every contract must tie directly to a specific underlying; netting across positions is not permitted.

3. Reporting

· Both counterparties must report the transaction to an IFSCA-recognized Trade Repository.

· For contracts tied to Indian securities (by an FPI), an extra report to SEBI is needed.

4. Clearing

· All contracts must be centrally cleared within one business day via a recognized clearing corporation—this reduces counterparty and systemic risk.

· Bilateral (non-cleared) contracts are not allowed unless explicitly stated.

5. Capital Requirements

· Non-bank entities (e.g., Broker-Dealers) must maintain a minimum net worth as specified by IFSCA, ensuring only financially sound players participate in this market.

Investor Protections & Safeguards

· Direct Linkage: Every derivative must correspond to an actual holding or offsetting position in the underlying security.

· Real-Time Oversight: Same-day trade reporting; central clearing for transparency and risk control.

· Market Integrity: No room for excessive leverage or hidden exposures through netting.

· Exclusion of Indian Residents: Unless regulatory permission is granted, to prevent domestic market risk spillovers.

Participating In the Public Consultation

Want to shape the rules?

· Market participants and stakeholders are encouraged to submit comments and suggestions with rationale before August 5, 2025.

· Contact:

· Shri Praveen Kamat (praveen.kamat@ifsca.gov.in)

· Shri Shubham Goyal (goyal.shubham@ifsca.gov.in)

Visual Overview

The IFSC OTC Derivatives Process

1.     Issuer (IBU/Broker-Dealer)

2.     Choose Underlying (IFSC/Foreign-listed Security)

3.     Create OTC Contract

4.     Both Parties Report to Trade Repository

5.     Contract Cleared by Central Clearing Corporation

6.     Ongoing Monitoring – No Netting, All Tied to Underlying

Summary Table: Key Features

Aspect	Rule/Requirement
Who can Issue	IFSC Banking Units, Broker-Dealers (others as permitted)
Permissible Underlyings	IFSC or foreign listed equities, bonds, designated index derivatives
Clearing	Mandatory central clearing within 1 business day
Reporting	Same-day to Trade Repository (and SEBI if FPI/Indian underlyings)
Netting	Not allowed; every contract tied one-to-one with underlying
Access	Only non-residents (Indian residents only with regulatory permission)
Capital Safeguard	Extra net worth required for non-bank issuers

Conclusion: Building a Safer, More Global IFSC

GIFT City’s IFSC is on the cusp of unlocking a dynamic OTC derivatives market, with safety nets and transparency to match global standards. The proposals ensure only sound, well-regulated entities can structure such contracts, every trade is traceable, and risk is carefully managed—setting the stage for deeper, more sophisticated international financial flows into India.