| The RBI introduced expanded and clearer definitions for key entities and concepts, including CCPs, QCCPs, netting sets, margining agreements and collateral structures.
Banks must apply stricter rules for recognising legally enforceable netting arrangements, with standalone treatment for transactions outside such frameworks. The draft refines capital treatment for CCP exposures, including default fund contributions and differentiation between initial margin and mutualised loss-sharing. It also introduced tighter rules on exposure caps, option premium deferment and standardised approaches to replacement cost and potential future exposure. |
The Reserve Bank of India (RBI) has proposed a sweeping overhaul of the capital adequacy framework for counterparty credit risk (CCR), issuing draft “Amendment Directions, 2026” that will significantly tighten how commercial banks measure exposures to derivatives, securities financing transactions and central counterparties. The draft mandates detailed revisions to definitions, netting rules, margin treatment and exposure calculations under the Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Directions, 2025, and will come into effect from April 1, 2027.
Under the proposed amendments, banks will be required to recalibrate minimum capital requirements for CCR in line with refined international standards, with sharper rules governing over-the-counter derivatives, exchange-traded derivatives, securities financing transactions and long-settlement trades. The RBI has also expanded the regulatory architecture to formally define key entities such as central counterparties (CCPs), clearing members, clients and qualifying central counterparties (QCCPs), alongside detailed definitions of margining agreements, netting sets, credit valuation adjustments and collateral structures.
A central element of the draft is the tightening of exposure measurement through clearer recognition of legally enforceable netting arrangements. The RBI has stipulated that netting sets must be properly defined and supported by enforceable bilateral agreements for capital relief to be granted, while transactions outside such frameworks will be treated as standalone exposures. The regulator has also introduced refined distinctions between margined and unmargined netting sets, with variation margin and initial margin treatment explicitly defined for CCR computation.
The draft also lays out a more structured capital treatment for exposures to central counterparties, including qualifying central counterparties (QCCPs). It defines how trade exposures and default fund contributions should be treated, particularly in complex clearing chains involving indirect clients and multi-level client structures. The framework clarifies that initial margin and default fund contributions must be distinguished based on their economic substance, with certain mutualised loss-sharing arrangements attracting default fund treatment.
Standardised approach
In addition, the RBI has introduced granular rules governing exemptions and caps on CCR exposure. Banks will be permitted to cap exposure on certain sold options and credit default swaps written outside netting and margin agreements at unpaid premium levels. The draft also allows deferral of option premiums under strict conditions, including Board-approved policies, periodic payment schedules and maturity-linked restrictions, while ensuring deferred premiums are incorporated into replacement cost calculations for CCR.
The amendments further refine the computation of counterparty credit risk by reinforcing the standardised approach framework, including clearer treatment of replacement cost, potential future exposure (PFE) add-ons and hedging sets. Long-settlement transactions, margin lending activities and securities financing transactions have also been brought under a more uniform capital computation structure, reducing scope for inconsistent interpretation across banks.
The RBI said the changes are intended to improve alignment with global best practices in counterparty credit risk regulation, enhance risk sensitivity in capital requirements and strengthen the resilience of banks against potential default shocks in increasingly complex financial markets.
