The Reserve Bank of India (RBI) has revised its counterparty credit risk (CCR) framework to better align with norms set by the Basel Committee on Banking Supervision, aiming to improve how banks measure exposures arising from derivatives.
The revisions lower capital add-ons for interest rate and foreign exchange contracts while increasing them for some long-dated equity and commodity swaps, a move that could temper activity in those segments.
The revised framework also clarifies the capital treatment for banks acting as clearing members on exchanges recognised by the Securities and Exchange Board of India (Sebi) in equity and commodity derivatives segments.
Under the revised rules, regulated entities must include CCR exposures of all entities consolidated under the Basel III framework when computing capital on a consolidated basis. The changes also revise the add-on factors used to calculate potential future exposure under the current exposure method, bringing them broadly in line with international standards.
“The RBI’s amendment to the counterparty credit risk framework is essentially a prudential refinement rather than a legal or structural change. It seeks to ensure that banks more accurately capture potential exposures arising from derivatives, particularly where they act as clearing members in exchange-traded markets,” said Pururaj Bhar, partner at Cyril Amarchand Mangaldas.
Experts said the clarification on clearing member exposures could encourage greater use of central clearing, collateralised netting, and stronger margining practices to manage risks. While the overall impact on system-wide capital is expected to be limited, banks with larger proprietary derivatives exposures may need to adjust pricing and operational frameworks.
“Reserve Bank of India’s amendment to the counterparty credit risk framework is a welcome step towards global harmonisation. By aligning add-on factors for potential future exposure with Basel III guidelines and clarifying capital treatment for clearing members, the RBI enhances clarity and stability across derivative markets,” said Debashree Dutta, co-founder and partner at Vritti Law Partners.
She added that while lower add-ons for interest rate and foreign exchange contracts may ease capital requirements, higher charges on long-dated equity and commodity swaps could dampen trading in those segments, though the overall impact on bank capital is likely to remain modest.