What changed
RBI reviewed the 2007 derivatives guidelines and updated the suitability and appropriateness policy (paragraph 8.3). Key changes include requiring market-makers to have a Board-approved policy for derivatives, mandating that structured products be sold only to users capable of mark-to-market valuation, and insisting on a corporate Board resolution authorizing specific products and personnel before any derivative transaction.
What it means for you
Banks must strengthen their due diligence processes to avoid mis-selling and protect against credit, reputation, and litigation risks. The revised guidelines place greater responsibility on market-makers to ensure users fully understand derivative risks and have proper risk management policies. This will likely increase compliance costs but reduce disputes and defaults.
What you must do
- Adopt a Board-approved Customer Appropriateness & Suitability Policy for derivatives business immediately.
- Ensure structured products are sold only to users who can mark-to-market and follow prudent accounting norms.
- Obtain a corporate Board resolution before offering derivatives, specifying authorized persons, products, limits, and reporting lines.
- Provide users with a mark-to-market calculator or access to one on your website for structured products.
- Review user documentation to confirm they have proper risk management policies in place.
Who it affects
All scheduled commercial banks (excluding RRBs and LABs), All India term-lending and refinancing institutions, Primary dealers, Corporate users of derivative products
What is the main purpose of the revised guidelines?
To prevent mis-selling of derivative products by ensuring market-makers only offer them to users who understand the risks and have proper policies, thereby reducing credit, reputation, and litigation risks for banks.
Do we need a new Board resolution for each derivative transaction?
Yes, before offering any derivative product, you must obtain a corporate Board resolution that specifies authorized persons, products, limits, and reporting lines, signed by someone other than the authorized officials.
What happens if a user cannot mark-to-market structured products?
You should not sell structured products to such users. You must also provide a mark-to-market calculator or access to one to enable ongoing valuation.