RBI Denies Bilateral Netting for Derivative Exposures
Current · Source: Reserve Bank of India · RBI/2010-11/223 · issued 01 Oct 2010 · ~1 min read
Quick answerRBI has disallowed bilateral netting of mark-to-market values for derivative contracts due to legal ambiguity. Banks must use gross positive MTM for capital adequacy and exposure norms, increasing capital requirements for derivative portfolios.
The rule, in the simplest words
Banks cannot use bilateral netting for derivative contracts due to legal ambiguity.
Banks must count gross positive mark-to-market (MTM) values for capital adequacy and exposure norms.
Bilateral netting of MTM values is not permitted, increasing capital requirements for derivative portfolios.
How it plays out — a real example
Rahul, a payments & clearing officer in Indore, needs to assess the capital requirements for a gold loan derivative contract. He must count the gross positive MTM value of the contract, rather than using bilateral netting, to ensure compliance with RBI regulations and maintain adequate capital reserves.
What changed
Previously, banks could use the Current Exposure Method for credit equivalent amounts. Now, RBI explicitly prohibits bilateral netting of MTM values, requiring gross positive MTM to be counted for capital and exposure norms.
What it means for you
Banks must hold more capital against derivative exposures as netting is not permitted. This increases capital costs and may reduce derivative trading appetite. Lenders need to reassess counterparty credit risk and capital planning for off-balance sheet items.
What you must do
Review derivative portfolios to calculate gross positive MTM for each counterparty.
Update capital adequacy and exposure limit calculations to exclude bilateral netting.
Communicate with risk and treasury teams to adjust capital planning and pricing.
Monitor legal developments on netting for future policy changes.
Who it affects
All scheduled commercial banks (excluding Local Area Banks and RRBs), Treasury and risk management departments, Derivative trading desks, Capital planning teams
❓ Common questions
Why did RBI disallow bilateral netting?
RBI found the legal position on bilateral netting unclear, so it decided not to permit netting of MTM values for derivative contracts.
How does this affect capital requirements?
Banks must use gross positive MTM instead of netted amounts, increasing credit equivalent amounts and thus capital requirements for derivatives.
Does this apply to all derivative types?
Yes, it applies to interest rate and foreign exchange derivative transactions and gold, as per the Current Exposure Method.
📜 Read the original circular — full text as issued by RBI
RBI/2010-11/223
DBOD.No.BP.BC.48 / 21.06.001/2010-11
October 1, 2010
All Scheduled Commercial Banks
(Excluding Local Area Banks and Regional Rural Banks)
Dear Sir,
Prudential Norms for Off-Balance Sheet Exposures of Banks –
Bilateral netting of counterparty credit exposures
As you are aware, in terms of our extant instructions issued vide our Master Circular – ‘Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy’, DBOD,No,.BP.BC.15 / 21.06.001 / 2010 - 11 dated July 1, 2010 , banks have been advised to adopt ‘Current Exposure Method’ for estimating their credit equivalent amount for interest rate and foreign exchange derivative transactions and gold. The credit equivalent amount is used for the purposes of capital adequacy and exposure norms.
2. On receipt of requests from banks, the issue of allowing bilateral netting of counterparty credit exposures, in such derivative contracts, has been examined within the existing legal framework. Since the legal position regarding bilateral netting is not unambiguously clear, it has been decided that bilateral netting of mark-to-market (MTM) values arising on account of such derivative contracts cannot be permitted. Accordingly, banks should count their gross positive MTM value of such contracts for the purposes of capital adequacy as well as for exposure norms.
Yours faithfully,
(B Mahapatra)
Chief General Manager-in-Charge
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2010-11/223 · issued 01 Oct 2010. The plain-English explanation above is BankPulse’s own independent summary.
Review derivative portfolios to calculate gross positive MTM for each counterparty.
💻 IT / Systems
Update capital adequacy and exposure limit calculations to exclude bilateral netting.
Communicate with risk and treasury teams to adjust capital planning and pricing.
📜 Compliance
Monitor legal developments on netting for future policy changes.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template
Example: if you are a Branch Manager at a bank this circular applies to (All scheduled commercial banks (excluding Local Area Banks and RRBs), Treasury and risk management departments, Derivative trading desks, Capital planning teams), your first concrete step on “RBI Denies Bilateral Netting for Derivative Exposures” is: “Review derivative portfolios to calculate gross positive MTM for each counterparty.” (RBI issued this 01 Oct 2010).
Circular: RBI/2010-11/223 -- RBI Denies Bilateral Netting for Derivative Exposures
Issued: 01 Oct 2010
Action required: Review derivative portfolios to calculate gross positive MTM for each counterparty.
Action required: Update capital adequacy and exposure limit calculations to exclude bilateral netting.
Action required: Communicate with risk and treasury teams to adjust capital planning and pricing.
Action required: Monitor legal developments on netting for future policy changes.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6023&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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