What changed
RBI introduced a mandatory minimum disclosure framework for derivatives risk exposures for term lending and refinancing institutions. The framework includes both qualitative discussions on risk management policies and quantitative data on notional amounts, mark-to-market positions, credit exposure, and interest rate sensitivity. Disclosures must be part of the 'Notes on Accounts' to the balance sheet effective from March 31, 2005 (June 30, 2005 for NHB).
What it means for you
Term lending and refinancing institutions must now provide transparent, standardized disclosures on their derivatives portfolio, enhancing market discipline and risk visibility. This aligns with international best practices and helps stakeholders assess risk management effectiveness. Institutions need to strengthen internal systems for tracking and reporting derivatives exposures accurately.
What you must do
- Implement the prescribed qualitative and quantitative disclosure format for derivatives in the 'Notes on Accounts'.
- Ensure risk management policies for derivatives are documented and discussed, covering hedging, trading, and risk mitigation.
- Calculate credit exposure using the Current Exposure Method as per RBI circular DBS.FID.No.C-12/01.02.00/2002-03.
- Report mark-to-market positions, notional principal amounts, and PV01 impact for both hedging and trading derivatives.
- Acknowledge receipt of the circular to RBI.
Who it affects
All-India Term Lending and Refinancing Institutions (Exim Bank, IDFC, IFCI, IIBI, NABARD, NHB, SIDBI, TFCI)
What is the effective date for these disclosures?
Disclosures must be made from March 31, 2005, except for National Housing Bank which has a deadline of June 30, 2005.
What quantitative data must be disclosed?
Institutions must disclose notional principal amounts for hedging and trading, mark-to-market positions (asset/liability), credit exposure, and the impact of a 1% interest rate change (PV01) for both currency and interest rate derivatives.
How should credit exposure be calculated?
Use the Current Exposure Method: sum the positive mark-to-market replacement cost and potential future exposure based on notional principal multiplied by conversion factors (e.g., 0.5% for interest rate contracts over one year).