RBI proposed such margin requirements be imposed on all non-centrally cleared derivatives, where at least one of the parties is a scheduled bank or an RBI-regulated entity
Mumbai: The Reserve Bank of India (RBI) on Monday proposed the introduction of margin requirements for derivative contracts that are not cleared by central counter parties, in line with the international trend of strengthening the regulatory framework for derivative markets.
A derivative contract cleared through a central counter party would be one, for instance, that is cleared through the Clearing Corporation of India or a stock exchange. An over-the-counter contract would qualify as a “non-centrally cleared contract".
“Counterparty credit risk is a major source of systemic risk in the OTC (over the counter) derivative market. The practice of bilateral margining can reduce contagion and spillover risks by ensuring that collateral is available to offset the losses caused by the default of a derivative counterparty," said the RBI while explaining the need to introduce such margin requirements.
In its paper, the RBI proposed that such margin requirements be imposed on all non-centrally cleared derivatives, where at least one of the parties is a scheduled bank or another RBI-regulated entity.
“As has been discussed earlier, the objective of introducing margin requirements is twofold: reduction of systemic risk and promotion of central clearing. In line with these objectives, those counterparties which do not pose significant systemic risk or may not be in a position to access central clearing facilities would be exempt from margin requirements," said the RBI, adding that the implementation of this principle will mean that small and medium enterprises are not burdened with these margin requirements.
The requirement of exchange of initial margin will be applied with a threshold of ₹ 350 crore, proposed the RBI, adding that this threshold will be applicable based on consolidated group activity.
Assets collected as margin should be highly liquid and should after accounting for haircut be able to hold their value in a time of financial market stress, the central bank added.
RBI has invited feedback on the paper by 3 June.
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