What changed
RBI issued directions under FEMA to allow posting and collection of margin for permitted derivative contracts between residents and non-residents. AD Cat-I banks can now use Indian currency, freely convertible foreign currency, Indian government debt securities, or AAA-rated rupee bonds for margin in India. Outside India, margin can be in freely convertible foreign currency or foreign sovereign debt rated AA- or above.
What it means for you
This circular expands the collateral options for cross-border derivative transactions, reducing reliance on cash-only margins. Banks can now accept a wider range of high-quality assets, potentially lowering counterparty risk and transaction costs. It also clarifies that interest can be paid on margin, making these contracts more attractive for hedging and investment.
What you must do
- Update internal policies to accept the specified margin types for permitted derivative contracts with non-residents.
- Set up separate accounts for cash margin in India for non-resident counterparties as required.
- Ensure compliance with the lowest credit rating rule when multiple ratings exist for debt securities.
- Train staff on the new margin eligibility criteria and documentation requirements.
Who it affects
Authorised Dealer Category-I banks, Indian residents entering derivative contracts with non-residents, Non-resident counterparties of permitted derivative contracts
What types of margin can be posted in India under this circular?
Margin can be posted in Indian currency, freely convertible foreign currency, debt securities issued by Indian central or state governments, or rupee bonds listed on a recognized Indian stock exchange with a AAA rating from a SEBI-registered agency.
Can margin be posted outside India?
Yes, AD Cat-I banks can post or collect margin outside India in freely convertible foreign currency or debt securities issued by foreign sovereigns with a credit rating of AA- or above from S&P/Fitch, or Aa3 or above from Moody's.
What happens if a debt security has different ratings from multiple agencies?
The lowest rating among the agencies must be used for determining eligibility.