What changed
RBI revised paragraph 6 of the April 2007 circular and the updated paragraph 8.3 from August 2011, based on FEDAI and market feedback. The revisions clarify that structured derivatives must not contain derivatives as underlying and must be specifically permitted. The updated guidelines take effect from January 1, 2012.
What it means for you
Banks acting as market-makers must ensure all derivative transactions, including structured products, comply with stricter suitability and appropriateness policies. They must be able to fair-value products using market prices or documented models with observable inputs. This enhances transparency and risk control in derivative offerings.
What you must do
- Update your bank's Suitability and Appropriateness Policy for derivatives to align with the revised guidelines by January 1, 2012.
- Ensure all structured derivative products offered are combinations of permitted generic instruments and do not contain derivatives as underlying.
- Document fair valuation models for structured products, ensuring all inputs are observable market variables.
- Review and document risks from derivatives at both transaction and portfolio levels as part of overall risk management.
Who it affects
All Scheduled Commercial Banks (excluding RRBs and LABs), All India Term-Lending & Refinancing Institutions, Primary Dealers
What is the effective date of the revised derivatives guidelines?
The revised guidelines will be effective from January 1, 2012.
What are the key changes to structured derivative products?
Structured products must be combinations of permitted cash and generic instruments, without derivatives as underlying, and must be specifically permitted by RBI.
How should banks value derivative products under the new guidelines?
Banks should mark to market if a liquid market exists, mark constituent instruments to market for structured products, or use a documented model with observable inputs if neither is feasible.