RBI proposes new derivative-risk capital framework effective April 2027

The draft requires commercial banks to adopt the basic approach for credit valuation adjustment while offering simpler treatment to those with smaller derivatives books

The Reserve Bank of India (RBI) has proposed a revised framework governing how commercial banks must set aside capital against the risk of losses on their derivative trades, replacing rules that have been in place since 2011.

 

The draft framework will apply to all commercial banks, excluding small finance banks, payments banks and local area banks.

 

The rules are proposed to take effect from 1 April 2027, and comments have been invited from banks, market participants and other stakeholders until 28 August 2026.

 

At the centre of the framework is credit valuation adjustment (CVA) — an adjustment banks make to the price of a derivative contract to account for the possibility that the counterparty on the other side of the trade could default. The capital charge ensures that banks set aside enough capital to cover such potential losses.

 

The existing framework was based on global standards issued by the Basel Committee on Banking Supervision (BCBS) in 2010. Since then, the BCBS has revised its guidelines as part of the final Basel III framework, prompting the RBI to update its rules to align them with global standards.

 

Under the proposed rules, banks will be required to use the basic approach for CVA (BA-CVA) to compute their capital charge, with a choice between a ‘full’ and a ‘reduced’ version.

 

The reduced version does not recognise any hedges a bank may have taken against its CVA risk and is meant for banks that do not hedge this risk.

 

The full version allows banks to factor in eligible hedges, such as single-name and index credit default swaps, provided they meet specific conditions linking the hedge to the counterparty.

 

Banks with a relatively small derivatives book — where the aggregate notional amount of non-centrally cleared derivatives is ₹10 trillion or less — can skip the BA-CVA computation altogether. Instead, such banks can set their CVA capital requirement equal to 100 per cent of their capital requirement for counterparty credit risk, though they will not be allowed to recognise any CVA hedges under this simpler treatment. The RBI's supervisory arm can still deny a bank this option if it finds that the bank's CVA risk is material to its overall risk profile.

 

The draft rules also introduce a more granular set of supervisory risk weights that banks must apply to counterparties based on the counterparty's sector and credit quality — split into investment-grade, high-yield or not-rated categories. Sectors such as financials attract a risk weight of 5 per cent for investment-grade counterparties and 12 per cent for others, while sovereigns attract the lowest weights of 0.5 per cent and 2 per cent, respectively.