RBI issues draft framework for novation of OTC derivative contracts

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The Reserve Bank on Wednesday issued draft guidelines for novation of OTC derivative contracts with a view to rationalising the related regulatory requirements.

Novation means the replacement of a market maker with another market maker in an OTC derivative contract between two counterparties to an OTC derivative transaction with a new contract between remaining party and a third party (transferee).

The transaction shall be undertaken at prevailing market rates, said the Draft Reserve Bank of India (Novation of OTC Derivative Contracts) Directions, 2025.

"The novation of an OTC derivative contract shall be done with the prior consent of the remaining party," it said.

It further added that the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Foreign Exchange Dealers' Association of India (FEDAI), as applicable, in consultation with market participants and based on international best practices, shall devise standard agreements for novation.

"Market participants may, alternatively, use a standard master agreement for novation," the draft said.

At present, the novation of OTC derivative contracts is governed by the RBI circular dated December 9, 2013.

The provisions of the circular have been reviewed in the light of changes in the overall regulatory framework governing OTC derivatives since 2013 and the market feedback received, as well as with a view to rationalising the related regulatory requirements, the RBI said.