Reserve Bank of India Act, 1934 | Chapter IIID

Sections 45-W and 45-X: Regulation of Derivatives and Duty to Comply

Sections 45-W and 45-X of the Reserve Bank of India Act, 1934, in Chapter IIID, provide the legal framework for Reserve Bank of India (RBI) directions governing interest-rate products, derivatives, securities, money-market instruments and related transactions. They also require the responsible management of regulated agencies to follow those directions and provide information requested by the RBI.

Meaning of the provisions and important definitions

Derivatives are instruments whose value is linked to underlying factors such as interest rates, exchange rates, credit indices or securities prices. Money-market instruments include call and notice money, term money, repos, reverse repos, certificates of deposit, commercial paper and specified short-term debt instruments. Repo generally involves selling securities with an agreement to repurchase them; reverse repo is the corresponding purchase with an agreement to resell. These statutory terms are defined in Section 45-U, while Section 45-V addresses the legal validity of certain derivatives transactions.

Section 45-W: Power to regulate transactions

Subsection (1) permits the RBI, in the public interest or to regulate the financial system to its advantage, to determine policy concerning interest rates or interest-rate products and to issue directions to all or selected agencies dealing in securities, money-market instruments, foreign exchange, derivatives or other similar instruments specified by the RBI. This is a statutory regulatory power and does not mean every market transaction is subject to identical directions.

Stock exchange limitation: the proviso excludes directions concerning the procedure for execution or settlement of the covered trades on stock exchanges recognised under Section 4 of the Securities Contracts (Regulation) Act, 1956. The distinction is between RBI regulation of covered products and agencies and the execution or settlement procedures reserved outside this particular direction-making power.

Subsection (2) authorises the RBI to request information, statements and particulars from covered agencies and to cause their inspection. In practice, regulated entities should check the applicable RBI directions, reporting formats and regulatory perimeter for the relevant product.

Section 45-X: Duty to comply and furnish information

Section 45-X imposes a legal duty on directors, members or other persons or bodies entrusted with the management of agencies covered by Section 45-W. They must comply with RBI directions and submit the information, statements or particulars required under Section 45-W. Compliance may involve maintaining records, ensuring timely regulatory reporting, responding to inspections and documenting adherence to applicable directions.

Practical implications

Market participants: identify whether the transaction and agency are covered by RBI directions issued under Section 45-W.
Boards and management: establish controls to implement directions and furnish accurate, timely information under Section 45-X.
Trading and settlement: distinguish RBI product-level regulation from the recognised-stock-exchange execution and settlement exception in the statutory proviso.
Current compliance: review later RBI directions and amendments before relying on an earlier circular or historical practice.

Text of Sections 45-W and 45-X

Section 45-W - Power to regulate transactions in derivatives, money market instruments, etc.

(1) The Bank may, in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time :

Provided that the directions issued under this sub-section shall not relate to the procedure for execution or settlement of the trades in respect of the transactions mentioned therein, on the Stock Exchanges recognised under section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

(2) The Bank may, for the purpose of enabling it to regulate agencies referred to in sub-section (1), call for any information, statement or other particulars from them, or cause an inspection of such agencies to be made.

Section 45-X - Duty to comply with directions and furnish information

It shall be the duty of every director or member or other body for the time being vested with the management of the affairs of the agencies referred to in section 45W to comply with the directions given by the Bank and to submit the information or statement or particulars called for under that section,

Official legal and regulatory resources

The applicable requirements depend on the product, participant, venue and RBI directions in force on the relevant date. Consult the official amended legislation and regulatory instruments for transaction-specific obligations.