The Reserve Bank of India has issued the Master Direction – Reserve Bank of India (Variation Margin) Directions, 2022. These Directions shall come into force with effect from December 01, 2022.

Applicability: The provisions of these Directions shall apply to the following contracts, which are entered into on or after the date on which these Directions come into force:

  1. Non-centrally cleared foreign exchange derivative contracts undertaken in terms of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 (Notification No. FEMA 25/RB-2000 dated May 3, 2000) and Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016, as amended from time to time;
  2. Non-centrally cleared interest rate derivative contracts undertaken in terms of the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 (Notification No. FMRD.DIRD.20/2019 dated June 26, 2019), as amended from time to time;
  3. Non-centrally cleared credit derivative contracts undertaken in terms of Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2022 (Notification No. FMRD.DIRD.11/14.03.004/2021-22 dated February 10, 2022), as amended from time to time; and
  4. Any other non-centrally cleared derivative (NCCD) contract as may be specified by the Reserve Bank.

Covered Entities

(1) The following entities shall be classified as Domestic Covered Entities under these Directions:

  1. Entities regulated by a financial sector regulator (including branches of foreign banks operating in India) and having an Average Aggregate Notional Amount (AANA) of outstanding NCCDs of ₹25,000 crore and above, on a consolidated group wide basis.
  2. Other resident entities having an AANA of outstanding NCCDs of ₹60,000 crore and above, on a consolidated group wide basis.

(2) The following entities shall be classified as Foreign Covered Entities under these Directions:

  1. Non-resident financial entities having an AANA of outstanding NCCDs of USD 3 billion and above, on a consolidated group wide basis.
  2. Other non-resident entities having an AANA of outstanding NCCDs of USD 8 billion and above, on a consolidated group wide basis.

 

Directions for Covered Entities

A Domestic Covered Entity shall exchange Variation Margin with a counter-party to an NCCD transaction if the counterparty is a Domestic Covered Entity or a Foreign Covered Entity. A Domestic Covered Entity shall put in place appropriate processes for ascertaining whether a counter-party to an NCCD transaction is a Domestic Covered Entity or a Foreign Covered Entity.

Note: The provisions of these Directions shall not be applicable to an NCCD transaction in which one of the counter-parties is any of the following entities:

  1. Government of India and State Governments;
  2. A Foreign Sovereign;
  3. A Central Bank;
  4. Bank for International Settlements; and
  5. Multilateral Development Banks (MDBs)

Calculation and exchange of Variation Margin

  1. Variation Margin shall be calculated on a daily basis, and called and exchanged at the earliest time possible after the transaction date or margin recalculation date, but no later than three local business days from the transaction date  or margin recalculation date.
  2. Variation Margin shall be exchanged to fully collateralise to market or settle to market, the mark-to-market exposure of an NCCD contract. In the event that the exposures cannot be marked-to-market, a pre-agreed alternative process or fallback mechanism, as set out in the credit support Annex, shall be used for the purpose of calculation of Variation Margin.
  3. Variation Margin shall be calculated and exchanged on an aggregate net basis, across all NCCD contracts that are executed under a single, legally enforceable netting agreement.
  4. A minimum transfer amount, not exceeding ₹3.5 crore, may be applied for the exchange of Variation Margin. The entire margin amount shall be exchanged if the Variation Margin amount exceeds the minimum transfer amount.

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