Mumbai, April 22. (PTI) : The Reserve Bank has issued detailed norms for banks and primary dealers, asking them to trade in rupee interest rates derivatives only with those who understand the risks associated with these products.

Derivatives are instruments, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating, price of securities, or a combination of these.

In money markets, rupee interest rate derivatives and foreign currency derivatives are allowed in India. Interest rate derivatives include interest rate swaps, forward rate agreement and interest rate futures.

RBI in its recent guidelines for rupee interest rate derivatives said, it is an imperative that market-makers offer derivative products only to those users who understand the nature of the risks inherent in these transactions.

Banks and dealers trade in derivatives to hedge future risks involved in exchange rate movements among other things.

Pointing out that rapid growth of derivatives market, especially structured ones, has increased the focus on suitability of these products, RBI said market-makers should undertake such transactions with a sense of responsibility that would avoid mis-selling and other such things.

Products being offered should be consistent with users' business, financial operations, skill and sophistication, internal policies as well as risk appetite, RBI said.

Inadequate understanding of the risks and future obligations under the contracts by users, in the initial stage, may lead to potential disputes and thus cause damage to the reputation of market makers, the RBI said.

The guidelines also limited the size of a bank's derivatives book to its net worth.