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Bilateral Netting: Exemptions Tightened for Banks

No longer current — withdrawn, no replacement on file yet
Source: Reserve Bank of India · RBI/2022-23/107 · issued 11 Aug 2022 · ~2 min read
Quick answerRBI clarifies that exemptions for short-term FX contracts and sold options under bilateral netting are withdrawn for entities using bilateral netting. The 14-day FX contract exemption applies only to Regional Rural Banks, Local Area Banks, and Co-operative Banks that have not adopted bilateral netting. Sold options and CDS caps apply only outside netting and margin agreements.

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 For all other regulated entities using bilateral netting, this exemption stands withdrawn.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.

Historical instruction — do not use for current compliance. This is what was required at the time; it no longer reflects current RBI requirements. If no replacement rule is linked above, that only means none is recorded on our register yet — it does not prove no later applicable rule exists. Confirm on the official RBI source below.

What banks were required to do at the time

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)

❓ Common questions

Regulatory timeline

Built from our lineage records — each fact carries its provenance; missing history simply is not shown (never guessed).

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.

📜 This document’s life story (1 recorded event, each backed by RBI’s own words)
Repealed by RBI/2025-26/100 — Consolidation of Regulations — Withdrawal of circulars (28 Nov 2025)
RBI’s words: “Official withdrawal register entry #222: DOR.MRG.REC.64/00-00-005/2022-23 — "Bilateral Netting of Qualified Financial Contracts - Amendments to Prudential Guidelines" dated August 11, 2022”
📜 Read the original circular — full text as issued by RBI
RBI/2022-23/107 DOR.MRG.REC.64/00-00-005/2022-23 August 11, 2022 Dear Sir / Madam, Bilateral Netting of Qualified Financial Contracts - Amendments to Prudential Guidelines Please refer to the circular DOR.CAP.51/21.06.201/2020-21 dated March 30, 2021 and circular DOR.CAP.REC.No.97/21.06.201/2021-22 dated March 31, 2022 on the captioned subject. 2. At present, while computing capital requirements for counterparty credit risk, the following exposures, wherever allowed to be undertaken, are exempted or capped: foreign exchange (except gold) contracts which have an original maturity of 14 calendar days or less are excluded from capital requirements for counterparty credit risk. ‘sold options’, provided the entire premium / fee or any other form of income is received / realised, are excluded from capital requirements for counterparty credit risk. For Credit Default Swap transaction where bank is protection seller, the exposure is capped at the amount of premium unpaid by the protection buyer. 3. We have received queries from regulated entities (REs) regarding the applicability of the above exemptions / caps under the Bilateral Netting framework. In this connection, it is clarified that: the exemption for foreign exchange (except gold) contracts which have an original maturity of 14 calendar days or less shall be applicable to entities calculating the counterparty credit risk under Original Exposure Method without taking the benefit of bilateral netting. Accordingly, the exemption would be applicable only to Regional Rural Banks, Local Area Banks and Co-operative Banks, where the bank has not adopted the bilateral netting framework. For other entities, the exemption shall stand withdrawn. ‘sold options’, provided the entire premium / fee or any other form of income is received / realised, can be excluded only when such ‘sold options’ are outside the netting and margin agreements. For Credit Default Swaps where the bank is the protection seller and that are outside netting and margin agreements, the exposure may be capped to the amount of premium unpaid. Banks have the option to remove such credit derivatives from their legal netting sets in order to apply the cap. 4. Accordingly, the select instructions have been modified/ amended as detailed in Annex . Applicability 5. This circular is applicable to all Commercial Banks, Co-operative Banks, Standalone Primary Dealers, Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SIs), Deposit taking Non-Banking Financial Companies (NBFC-Ds) and Housing Finance Companies (HFCs). 6. These instructions shall come into force with immediate effect. Yours faithfully, (Usha Janakiraman) Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2022-23/107 · issued 11 Aug 2022. The plain-English explanation above is BankPulse’s own independent summary.
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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12376&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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