New Delhi, Nov. 1: Banks and money market players have sought a wider definition of derivatives encompassing loans and debt obligations in the proposed Reserve Bank of India (Amendment) Bill.

They have also demanded that the definition of derivatives in the RBI act should be in consonance with the Securities Contract Regulation Act (SCRA), 1956.

A derivative is a financial instrument, which derives its characteristic value from an ‘underlier’ that can be commodities, precious metals, currency, bonds, stocks and stock indices.

Sources said the Indian Banks Association (IBA) as well as the Fixed Income Money Market and Derivatives Association of India (FIMMDA), have expressed their concerns about the differences in the definition of derivatives in the two legislations and have sought necessary amendments in the proposed act.

The RBI (Amendment) Bill, 2005, which is expected to be passed by Parliament in the coming winter session, seeks to confer specific powers to the RBI to regulate transactions in derivatives.

The SCRA, which was amended in 1999 to facilitate derivative transactions, states that notwithstanding anything in any other law, contracts in derivatives shall be legal and valid if such contracts are traded on recognised stock exchanges.

At the same time, the proposed RBI (Amendment) Act clearly states that transactions in derivatives, as specified by the bank from time to time, shall be deemed to be valid, notwithstanding anything contained in the SCRA.

While derivative transactions in commodities as underlyings are conducted through exchanges, credit derivatives (loans and debts as underlyings) are transacted through banking institutions.

Sources said unless amended, this would give rise to a situation where there are two statutes, defining the validity of a derivative transaction. This could lead to a piquant situation where a transaction could be valid under the SCRA, but would not pass muster under the terms of the RBI act.

“Such a situation will result in ambiguity about the validity and enforceability of a derivative contract,” sources said. It is necessary that a declaratory provision is made about the validity of derivative transactions, which should apply to all derivative transactions through a stock exchange or entered into with a bank.

Bankers said it is necessary to include “loans and debt obligations” as an “underlying”.