CCP must for inter-bank forex swaps: RBI panel

The RBI panel says CCP can improve the effectiveness of default management arrangements and co-ordinate operational improvements and efficiencies

A Reserve Bank of India (RBI) panel on reforms in over-the-counter (OTC) foreign exchange derivatives has recommended that clearing of interbank trades in foreign exchange forward and swaps should be mandatorily done on the central counter party (CCP) platform by the end of this month.

CCP acts as a central hub for market participants. It can improve the effectiveness of default management arrangements and coordinate operational improvements and efficiencies, according to the RBI panel headed by its executive director, R Gandhi.

About the use of CCP platform for interest rate swaps (IRS), the panel said the proposal to provide CCP-based clearing is already under consideration. It should be operational by March 2014.

The Clearing Corporation of India (CCIL) provides guaranteed central clearing facility in forex forward. Although it is not mandatory for banks to clear interbank trades through CCIL's central clearing, more than 90 per cent of trades are being centrally cleared.

The panel said IRS trades that are not yet cleared centrally should attract margins and arrangements for that should be worked out. At present, IRS trades are not margined according to market practice.

About using the CCP platform for clearing credit default swaps (CDS) , the panel was of the view that CCP-based clearing for CDS contracts may be put in place by March 2015. By then, this would be subject to adequate liquidity in the instrument.