What changed
RBI has clarified that the exemption for foreign exchange contracts (excluding gold) with original maturity of 14 days or less from counterparty credit risk capital requirements is now available only to Regional Rural Banks, Local Area Banks, and Co-operative Banks that have not adopted bilateral netting. For all other regulated entities using bilateral netting, this exemption stands withdrawn. Additionally, the exclusion for sold options and the cap on Credit Default Swap exposure for protection sellers apply only when these instruments are outside netting and margin agreements.
What it means for you
Banks that have adopted bilateral netting can no longer claim the 14-day FX contract exemption or the sold options exclusion for capital computation unless those positions are explicitly kept outside netting and margin agreements. This increases capital requirements for counterparty credit risk for most commercial banks, NBFCs, and HFCs. Lenders must review their netting sets and decide whether to remove certain derivatives to retain exemptions or accept higher capital charges.
What you must do
- Review your bilateral netting framework to identify FX contracts under 14 days and sold options currently benefiting from exemptions.
- Assess whether to remove sold options and CDS protection seller positions from netting sets to retain the cap or exclusion.
- Update capital computation models to reflect the withdrawal of exemptions for entities using bilateral netting.
- Communicate changes to risk and compliance teams to ensure accurate regulatory reporting.
Who it affects
All Commercial Banks, Co-operative Banks, Standalone Primary Dealers, Systemically Important NBFC-ND-SIs, Deposit-taking NBFCs (NBFC-Ds), Housing Finance Companies (HFCs)
Does this circular affect RRBs and LABs that use bilateral netting?
Yes, if an RRB or LAB has adopted bilateral netting, the 14-day FX contract exemption is withdrawn for them as well. The exemption applies only to entities using the Original Exposure Method without netting.
Can we still exclude sold options from capital requirements if they are part of a netting agreement?
No. The exclusion for sold options applies only when they are outside netting and margin agreements. If they are inside, the exclusion is not available.
What should we do with Credit Default Swaps where we are the protection seller?
You can cap the exposure at the amount of unpaid premium only if the CDS is outside netting and margin agreements. You have the option to remove such CDS from your legal netting sets to apply the cap.