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    RBI Consults on Variation Margin Requirements for OTC Derivatives

    September 07, 2020

    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

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