RBI revises initial margin requirement for liquidity collateral

In line with international standards, the Reserve Bank of India (RBI) announced that starting August 1, a new initial margin on collateral will be required on the basis of residual maturity.

In its monetary policy statement, the RBI's six-member monetary policy committee said the initial margin requirement for central government securities would be in the range of 0.5 to 4 percent in five different buckets of residual maturity.

In terms of State Development Loans (SDLs), the RBI said initial margin requirement would be in the range of 2.5 to 6 percent for the same maturity buckets.

With a view to incentivise state governments to get SDLs a public rating, the central bank set an initial margin requirement for rated SDLs at one percent lower than that of other SDLs for the same maturity buckets.

"Presently, the Reserve Bank provides rupee liquidity to market participants through the Repo/Marginal Standing Facility (MSF) window against eligible collateral. An initial margin of four percent and six percent is currently applied on Central Government Securities (including T-bills) and SDLs respectively, submitted as collaterals by participants in Repo/MSF. Since the margin requirement is similar for all eligible securities irrespective of residual maturity, the prevailing system does not differentiate the market risk across securities," the RBI said in a statement.

Furthermore, the central bank announced that regulations will be introduced, in line with the best global practices, to prevent abuse in markets regulated by it.

Draft regulation for consultation will be issued by the end of August 2018, it said.

"Fixed Income Money Market and Derivatives Association of India (FIMMDA) has developed a fair practice code (FPC) for voluntary adoption by banks and other members. The Foreign Exchange Dealers' Association of India (FEDAI) has also adopted for market participants in the Indian Foreign Exchange (FX) market, the FX Global Code ­- a global code of conduct for the wholesale FX market that sets out principles to promote a robust, fair, liquid, open and appropriately transparent market, underpinned by high ethical standards. To take this process further, it is proposed to introduce regulations, in line with the best global practices, to prevent abuse in markets regulated by the Reserve Bank," it added.