The apex bank is likely to allow corporates to conduct interest rate swaps as counter-parties. The guidelines on interest rate swaps will have to set out a framework with regard to standard documentation, benchmarks, capital adequacy and the list of potential participants.

"To facilitate hedging of interest rate risk and ensuring orderly developement of the derivatives market, guidelines for interest rate swap and FRAs are being issued shortly", Jalan said today.

The introduction of interest rate swaps will provide a credible benchmark in the securities market. Corporates, on their part, will be able to manage their cash flows more efficiently as they will have direct access to the money market through this derivative.

Sources said that a draftframework in this regard has been worked out. It says that commercial banks, primary dealers, financial institutions and corporates will be allowed to conduct interest rate swaps. However, a decision has yet to be taken whether all corporates will be allowed to enter into interest rate swaps or only some.

"Overseas, only those corporates which have a good credit rating are allowed to conduct swaps. Prudential norms are likely to be applied as a credit risk is involved for the bank and the primary dealers entering into interest rate swaps," a source said. The RBI has said that the capital adequacy norms for banks will apply as per a department of banking operations and developement (DBOD) circular issued in 1992. The calculation of risk weightage will be based on the norms laid out in the circular. The circular says that the credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face value of each of the balance sheet items by the credit conversionfactors.

The RBI says that if the original maturity of the swap is less than one year--as most interest rate swaps are expected to be--the notional principal amount of each intruments should be multipled by 0.5 per cent, while for maturities of one year and less than two years, the principal has be multiplied by 1.0 per cent. For each additional year the notional principal will be multiplied by 1 per cent for calculation of risk weights.

According to the RBI, interest rate contracts include single currency interest rate swaps, basis swaps, forward rate agreements, interest rate futures, interest rate options purchased and other contracts of a similar nature.