RBI notifies Master Direction – Reserve Bank of India (Variation Margin) Directions, 2022; effective from 1st December, 2022

Reserve Bank of India (“RBI”) has issued Notification No. FMRD.DIRD.03/14.01.023/2022-23 to notify the Master Direction – Reserve Bank of India (Variation Margin) Directions, 2022 which shall come into force with effect from 1st day of December, 2022.
Applicability
The provisions of this Direction shall apply to the following contracts, which are entered into on or after the date on which this Direction shall come into force:
(a) Non-centrally cleared foreign exchange derivative contracts undertaken in terms of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000;
(b) Non-centrally cleared interest rate derivative contracts undertaken in terms of the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019;
(c) Non-centrally cleared credit derivative contracts undertaken in terms of Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022;
(d) Any other non-centrally cleared derivative (NCCD) contract as may be specified by the Reserve Bank.
Objective
To regulate the settlement of non-centrally cleared derivative (NCCD) contracts. NCCDs mean derivative contracts whose settlement is not guaranteed by a central counterparty.
Covered Entities
(A) The following entities shall be classified as Domestic Covered Entities under these Directions:
1. Entities regulated by a financial sector regulator (including branches of foreign banks operating in India) and having an Average Aggregate Notional Amount (AANA)# of outstanding NCCDs of INR 25,000 crore and above, on a consolidated group wide basis.
2. Other resident entities having an AANA of outstanding NCCDs of INR 60,000 crore and above, on a consolidated group wide basis.

(B) The following entities shall be classified as Foreign Covered Entities under these Directions:
1. Non-resident financial entities having an AANA of outstanding NCCDs of USD 3 billion and above, on a consolidated group wide basis.
2. Other non-resident entities having an AANA of outstanding NCCDs of USD 8 billion and above, on a consolidated group wide basis.

Directions for the covered entities

1) A Domestic Covered Entity shall exchange Variation Margin with a counterparty to an NCCD transaction if the counterparty is a Domestic Covered Entity or a Foreign Covered Entity.
2) A Domestic Covered Entity shall put in place appropriate processes for ascertaining whether a counterparty to an NCCD transaction is a Domestic Covered Entity or a Foreign Covered Entity. For this purpose, Domestic Covered Entities may, inter alia, rely on a declaration from the counterparties.
3) The provisions of these Directions shall not apply to physically-settled foreign exchange forward and physically-settled foreign exchange swap contracts. However, Domestic Covered Entities are expected to appropriately manage the risks associated with such transactions.
4) The provisions of these directions shall not be applicable to an NCCD transaction in which one of the counterparties is Government of India and State Governments; a foreign sovereign, a central bank, Bank for International Settlements; and multilateral development banks.
5) The provisions of these Directions shall not be applicable to an NCCD transaction between entities belonging to the same consolidated group.
6) Variation Margin between two Domestic Covered Entities shall be exchanged using the following collateral types:
(a) Indian Currency;
(b) Debt securities issued by Government of India and State Governments; and
(c) Rupee bonds issued by persons resident in India (which are listed on a recognised stock exchange in India; and assigned a credit rating of AAA by a rating agency)
7) Variation Margin between a Domestic Covered Entity and a Foreign Covered Entity shall be exchanged using the above-mentioned collateral types and Freely convertible foreign currency and Debt securities issued by foreign sovereigns with a credit rating of AA- and above.

For further details please refer the attached document.

^#Average Aggregate Notional Amount of outstanding NCCDs

(1) AANA of outstanding NCCDs shall be calculated as the simple average of the total notional amount of outstanding NCCDs as at the end of March, April and May of a year. AANA for a year shall be used for recognition of Domestic Covered Entities and Foreign Covered Entities for a one-year period from September 1 of that year to August 31 of the next year.

(2) AANA calculation shall include all NCCD contracts of the consolidated group, including those outside the scope of these Directions, but exclude intra-group transactions.

Source : Reserve Bank of India