RBI Circular Addresses Measurement of Capital Charge for Market Risk
RBI issued a circular that addresses the treatment of debt mutual funds/exchange-traded funds (ETFs) while computing capital charge for market risk under the Basel III capital regulations. According to Para 8.4.1 of the Master Circular on Basel III capital regulations, capital charge for equities is applicable to units of mutual funds. This recent circular details the RBI decision on computation of capital charge for market risk for the banks investing in a debt mutual fund/ETF with underlying comprising the Central, State, and Foreign Central Governments’ bonds; bank bonds; and corporate bonds (other than bank bonds).
Under the Basel III capital rules in the Master Circular, the minimum capital requirement is expressed in terms of two separately calculated charges. One is the "specific risk" charge for each security, which is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer, both for short (short position is not allowed in India except in derivatives and Central Government Securities) and long positions. The other is the "general market risk" charge toward interest rate risk in the portfolio, where long and short positions (which is not allowed in India except in derivatives and Central Government Securities) in different securities or instruments can be offset. The circular covers the following points with respect to the computation of capital charge for market risk:
- Investment in debt mutual fund/ETF, for which full constituent debt details are available, shall attract general market risk charge of 9%, as hitherto. Additionally, the Annex to this recent circular details the application of specific risk capital charge for exposures to securities issued by Indian and foreign sovereigns, bonds issued by banks, and corporate bonds (other than bank bonds).
- In case of debt mutual fund/ETF, which contains a mix of the debt instruments, the specific risk capital charge shall be computed based on the lowest rated debt instrument or instrument attracting the highest specific risk capital charge in the fund.
- Debt mutual fund/ETF, for which constituent debt details are not available, at least as of each month-end, shall continue to be treated on par with equity for computation of capital charge for market risk, as prescribed in Para 8.4.1 of the Master Circular on Basel III capital regulations.
Keywords: Asia Pacific, India, Banking, Basel, Regulatory Capital, Market Risk, Mutual Funds, ETF, RBI
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
RBI Announces Additional Regulatory Policy Measures Amid PandemicRelated Articles
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.