RBI revises banks' capital market exposure norms for T+1 settlement

The limit of 30 per cent for risk is based on the assumption of 20 per cent downward price movement of the equities on T+1

The Reserve Bank of India (RBI) has revised the guidelines for custodian banks to issue Irrevocable Payment Commitments (IPCs) in light of the T+1 settlement regime for stocks. The maximum intraday risk to the custodian banks issuing IPCs would be considered as capital market exposure (CME) at 30 per cent of the settlement amount.

The limit of 30 per cent for risk is based on the assumption of a 20 per cent downward price movement of the equities on T+1, with an additional margin of 10 per cent for further downward movement of price. Earlier, the risk mitigation measures were prescribed based on T+2 rolling settlement for equities (T being the trade day).

Only custodian banks, who have an agreement with clients giving them an inalienable right over the securities for receiving a payout in the settlement, are permitted to issue IPCs. This clause will not be insisted upon if the transactions are pre-funded. The clear rupee funds have to be available in the customer’s account or, in case of foreign exchange deals, the bank’s nostro account has been credited before the issuance of the IPC, RBI said. 

The central bank said in case the margin was paid in cash, the exposure would stand reduced by the amount of margin paid. Also, when the case margin is paid by way of permitted securities to mutual funds and foreign portfolio investors (FPIs), the exposure will stand reduced by the amount of margin. This would be after adjusting for a haircut as prescribed by the Exchange on the permitted securities accepted as margin.

Under the T+1 settlement cycle, the exposure shall normally be intraday. However, if exposure remains outstanding at the end of T+1 Indian Standard Time, the bank will have to maintain capital based on the outstanding capital market exposure, RBI said.

The underlying exposures of banks to their counterparties, emanating from the intraday capital market exposure (CME), will be subject to limits prescribed under Large Exposure Framework.