RBI tightens trading book rule, allows exclusion of structural FX positions

The new framework, effective April 2027, also tightens investment reclassification rules and revises capital treatment for debt funds and other instruments.

The Reserve Bank of India (RBI) on Monday tightened rules governing the classification of investments between banks’ trading and banking books to prevent regulatory arbitrage, while allowing lenders to exclude certain structural foreign exchange positions from their net open position (NOP) under a new market-risk capital framework.

 

Banks will not be allowed to shift instruments between the two books with the intention of lowering their capital requirements. If a reclassification results in a lower capital requirement, banks will have to maintain the difference as an additional capital surcharge.

 

“A bank shall not reclassify instruments between the trading book and the banking book for regulatory arbitrage, i.e., with the intention of achieving lower capital requirements,” the central bank said.

 

The new framework is aimed at aligning the market-risk capital framework with the revised Basel III framework, while ensuring simplicity of regulations and providing flexibility and ease of adoption, the RBI said.

 

The directions will take effect from April 1, 2027.

 

Under the new framework, banks can exclude certain structural, or non-dealing, foreign currency positions from their NOP. These include capital investments and accumulated or unremitted surplus in overseas subsidiaries, joint ventures and associates, overseas branches, IFSC Banking Units and Offshore Banking Units in Special Economic Zones.

 

The exclusion will be subject to conditions. The RBI said, the exclusion is limited to the amount that neutralises the sensitivity of the capital ratio to movements in exchange rates. Banks will have to maintain the exclusion for at least six months, apply the treatment consistently and follow their risk management policy for such positions.

 

The framework also changes the capital treatment of debt mutual funds and exchange-traded funds (ETFs) held by banks. Investments in funds that have at least 90 per cent of their assets under management (AUM) in debt instruments and meet specified requirements on disclosure of holdings and valuation will be assessed based on the underlying debt securities.

 

Funds that do not meet these conditions, including those with less than 90 per cent of their AUM in debt instruments, will be treated on par with equity for calculating market-risk capital. Certain other investments, including contributions to the Corporate Debt Market Development Fund (CDMDF), will attract a 9 per cent capital charge.

 

The RBI has also prescribed a 12 per cent specific-risk capital charge for certain non-equity capital instruments issued by banks and other financial entities, irrespective of their external credit rating, subject to specified exclusions.

 

The broader framework covers interest-rate, equity and foreign-exchange risks, with foreign-exchange risk applying to both trading and banking-book positions. Banks will have to meet the required market-risk capital at the close of each business day.