Derivatives trade: RBI eases banks' exposure norms

At present, the ceiling on such exposure to a single counterparty is 15% of capital funds

The Reserve Bank of India (RBI) has said banks’ exposure to qualified central counter-parties for clearing activity (pertaining to derivative products) will be kept outside the ceiling on the permitted amount of loans and credit lines to a single such entity.

A central counterparty (CCP) is an institution, acting in one or more securities or cash markets, that is interposed between two trading parties. It guarantees the underlying transaction by acting as a matching seller to the buyer and a matching buyer to the seller.

At present, the ceiling on such exposure to a single counterparty is 15 per cent of capital funds.

The recent financial crisis highlighted the need to promote a central clearing of standardised over-the-counter derivative products through a CCP, said RBI in a notification on Tuesday.

As an interim measure, a bank’s clearing exposure to a Qualifying CCP (QCCP) will be kept outside of the exposure ceiling. Clearing exposure would include trade exposure and default fund exposure.

RBI would consider a revised framework on banks’ exposure to QCCPs as and when the Basel Committee on Banking Supervision finalises its proposal in this regard.

Other exposures to QCCPs — such as loans, credit lines, investments in the capital of a CCP, liquidity facilities, etc — will continue to be within the existing exposure ceiling of 15 per cent of capital funds to a single counterparty.

Currently, there are four CCPs — Clearing Corporation of India (CCIL), National Securities Clearing Corporation, Indian Clearing Corporation and MCX-SX Clearing Corporation. CCIL has been granted the status of a QCCP by the central bank. The other three have been granted this status by the Securities and Exchange Board of India.

Banks are to report their clearing exposures to each QCCP to RBI within seven days of each succeeding month. In cases where a bank’s exposure is considered high, RBI may tell it to reduce the exposure within a certain time period or maintain a higher level of capital on such exposure.