RBI is consulting on the draft for Variation Margin (Reserve Bank) Directions for 2020. The draft provides directions for calculation and exchange of variation margin, eligible collateral and haircuts, treatment of cash collateral as variation margin, margin requirements for cross-border non-centrally cleared derivative transactions, and dispute resolution. A schedule of minimum haircuts, to be applied on the collateral exchanged as variation margin, has been set out in Annex 1 of the draft directions. Comments on the draft directions are invited from banks, market participants, and other interested parties by October 15, 2020.
In February 2020, RBI announced that it will issue the directions on the exchange of variation margin for non-centrally cleared derivatives, following the G-20 recommendations. The aim is to improve safety of settlement of over-the-counter (OTC) derivatives that are not centrally cleared. The following are the key highlights of the recently published draft directions:
- These directions shall be applicable to Domestic Covered Entities. In these directions, the term Domestic Covered Entities means financial entities regulated by RBI, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, and Pension Fund Regulatory and Development Authority of India; these also include International Financial Services Centre (IFSC) Banking Units (IBUs) and certain other entities with average aggregate notional amount of outstanding non-centrally cleared derivatives of INR 50,000 crore and above, on a consolidated group-wide basis.
- Variation margin shall be calculated on a daily basis and exchanged at the earliest possible after the transaction date (T) or margin recalculation date (R), but no later than the end of the next local business day (T+1 or R+1).
- Variation margin shall be exchanged to fully collateralize to market or settle to market, the mark-to-market exposure of a non-centrally cleared derivative contract. If the exposures cannot be marked-to-market, a pre-agreed alternative process or fallback mechanism shall be used.
- Variation margin shall be calculated and collected on an aggregate net basis, across all non-centrally cleared derivative contracts that are executed under a single, legally enforceable netting agreement.
- A minimum threshold of INR 0.50 million will be applicable for the exchange of variation margin. The participants may agree to not exchange margin if the variation margin amount due, since the last exchange of margin, is lower than the minimum threshold. The entire margin amount will need to be mandatorily exchanged if the variation margin amount is equal to or more than INR 0.50 million.
Comment Due Date: October 15, 2020
Keywords: Asia Pacific, India, Banking, Securities, Margin Requirements, Non-Currently Cleared Derivatives, OTC Derivatives, Variation Margin, RBI
Previous ArticleRBI Circular Sets Out Financial Parameters for Resolution Framework
Next ArticleCMF Announces Strategic Initiatives for 2020-2022
PRA published the policy statement PS8/21, which contains the final supervisory statement SS3/21 on the PRA approach to supervision of the new and growing non-systemic banks in UK.
EBA published a report that sets out the final draft regulatory technical standards specifying the conditions according to which consolidation shall be carried out in line with Article 18 of the Capital Requirements Regulation (CRR).
EBA updated the list of other systemically important institutions (O-SIIs) in EU.
BCBS published two reports that discuss transmission channels of climate-related risks to the banking system and the measurement methodologies of climate-related financial risks.
UK Authorities (FCA and PRA) welcomed the findings of FSB peer review on the implementation of financial sector remuneration reforms in the UK.
PRA and FCA jointly issued a letter that highlights risks associated with the increasing volumes of deposits that are placed with banks and building societies via deposit aggregators and how to mitigate these risks.
MFSA announced that amendments to the Banking Act, Subsidiary Legislation, and Banking Rules will be issued in the coming months, to transpose the Capital Requirements Directive (CRD5) into the national regulatory framework.
EC finalized the Delegated Regulation 2021/598 that supplements the Capital Requirements Regulation (CRR or 575/2013) and lays out the regulatory technical standards for assigning risk-weights to specialized lending exposures.
OSFI launched a consultation to explore ways to enhance the OSFI assurance over capital, leverage, and liquidity returns for banks and insurers, given the increasing complexity arising from the evolving regulatory reporting framework due to IFRS 17 (Insurance Contracts) standard and Basel III reforms.
ECB published results of the benchmarking analysis of the recovery plan cycle for 2019.