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
FSB Sets Out Effective Practices for Cyber Incident Recovery
FSB finalized the toolkit of effective practices to assist financial institutions in their cyber incident response and recovery activities.
HKMA Urges Early Action for Adherence to IBOR Fallbacks Protocol
HKMA urged authorized institutions to take early action to adhere to the IBOR Fallbacks Protocol, which ISDA is expected to publish soon.
FSB Sets Out Roadmap for Transition to Alternative Reference Rates
FSB published a global transition roadmap for London Inter-bank Offered Rate (LIBOR).
HM Treasury Publishes Response to Proposal on BRRD2 Transposition
HM Treasury published a document that summarizes the responses received from a consultation on the approach of UK to transposition of the revised Bank Resolution and Recovery Directive (BRRD2).
HM Treasury Publishes Response to Proposal on CRD5 Transposition
HM Treasury published the government response to the feedback received on the consultation for updating the prudential regime of UK before the end of the Brexit transition period.
BoE Publishes Reporting Schedule for Statistical Returns
In a recent statistical notice, BoE announced publication of the reporting schedule for statistical returns for 2021.
EC Welcomes Declaration by Member States on EU Cloud Federation
EC welcomed the joint declaration by 25 EU member states on building the next generation of cloud in Europe.
PRA Updates Supervisory Statement on Counterparty Credit Risk
PRA published the final policy statement PS22/20, which contains the updated supervisory statement SS12/13 on counterparty credit risk.
FSB Publishes Update on Work to Address Market Fragmentation
FSB published an update on its work to address market fragmentation. FSB is working in this area in collaboration with the other standard-setting bodies.
EBA Proposes to Revise Guidelines on Incident Reporting Under PSD2
EBA proposed revisions to the guidelines on major incident reporting under the second Payment Service Directive (PSD2).
