RBI Consults on Variation Margin Requirements for OTC Derivatives
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
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.
Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Previous Article
RBI Circular Sets Out Financial Parameters for Resolution FrameworkNext Article
CMF Announces Strategic Initiatives for 2020-2022Related Articles
ESAs Issue Multiple Regulatory Updates for Financial Sector Entities
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
FSB and NGFS Publish Initial Findings from Climate Scenario Analyses
The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.
FSB Issues Reports on NBFI and Liquidity in Government Bonds
The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.
ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
EBA Finalizes Methodology for Stress Tests, Issues Other Updates
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
EU Finalizes Rules Under Crowdfunding Service Providers Regulation
The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.
OSFI Sets Out Work Priorities and Reporting Updates for Banks
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
APRA Finalizes Changes to Capital Framework, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.
BIS Hub and Central Banks Conduct CBDC and DeFI Pilots
The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.
