ISDA has published a whitepaper that presents a comprehensive review of the current state and future trajectory of India’s over-the-counter (OTC) derivatives market. As the financial landscape evolves, it becomes imperative to assess the market’s dynamics, challenges and opportunities to facilitate informed market developments and advances in regulation. ISDA commissioned Acies LLP to undertake an in-depth market study and develop this whitepaper based on its primary and secondary research and in consultation with ISDA and its members.

India has become a key driver of economic growth in the world, with GDP growth of 7.2% in the fiscal year 2022-2023, which is the second highest among the Group of 20 countries and almost twice the average for emerging market economies. India is expected to become the second largest economy in Asia and the third largest in the world by 2030.

In the past few years, efforts led by Indian policymakers have driven significant expansion of the OTC derivatives market, with its notional value reaching around $9.27 trillion in 2022, making it the 20th largest OTC derivatives markets globally. Key factors include the enactment of the Bilateral Netting of Qualified Financial Contracts Act in 2020, the extension of market access to non-residents, the introduction of central clearing services for OTC derivatives to manage counterparty credit risk, and a regulatory shift towards principles-based regulation, facilitating ease of market access and encouraging innovation in new financial products.

This whitepaper shows that while India’s economic growth is already at full force, its OTC derivatives market has considerable potential for further growth, commensurate with the size and growth trajectory of its economy. The whitepaper presents a roadmap for the next phase of India’s OTC derivatives market. It includes recommendations to unlock opportunities for market development, such as the development of OTC derivatives products (eg, credit and commodity derivatives, standardized term benchmarks), and increase market participation, with greater harmonization of regulations on usage and permissibility of OTC interest rate, FX and credit derivatives for insurance companies, asset management companies and pension funds. The paper also recommends a greater cultivation of risk management culture and practices through the use of OTC derivatives by corporates, and further alignment with international principles and practices (eg, adoption of the standardized approach for counterparty credit risk or finalization of initial margin rules for non-centrally cleared derivatives. Taken together, these developments would support the growth of a more vibrant and safer derivatives market to support India’s financial sector and economic growth.

ISDA encourages stakeholders, regulators and market participants to engage with the insights presented in this whitepaper, fostering greater market collaboration and driving further evolution of India’s OTC derivatives market.

Click on the PDF below to read the paper.