Master Direction – RBI Margining for Non-Centrally Cleared OTC Derivatives Directions, 2024

The Reserve Bank of India (RBI) has introduced a pivotal directive, the Master Direction – RBI Margining for Non-Centrally Cleared OTC Derivatives Directions, 2024, slated to come into effect on November 8, 2024. This directive marks a significant stride in enhancing risk management practices within India’s financial landscape.

Applicability and Scope

The directive encompasses various derivative contracts, including foreign exchange, interest rate, and credit derivatives, emphasizing risk mitigation strategies for non-centrally cleared transactions. Its application extends to entities regulated by financial sector regulators, ensuring comprehensive coverage across the financial spectrum.

Grandfathered Contracts and Genuine Amendments

A notable aspect is the provision for genuine amendments to existing derivative contracts, termed as ‘grandfathered contracts.’ These amendments, if non-material or intended to address benchmark reforms, do not trigger the directive’s applicability. However, contracts resulting from novation and portfolio compression remain subject to margin requirements, fostering continuity while accommodating necessary adjustments.

Entity Scope and Margin Exchange Mechanisms

Central to the directive is the classification of covered entities based on their aggregate notional amount of outstanding derivative contracts. Whether domestic or foreign, these entities are mandated to exchange variation and initial margins, fostering accountability and risk mitigation.

Margin Calculation and Exchange Mechanisms

The directive outlines precise methodologies for margin calculation and exchange, emphasizing timeliness and accuracy. With provisions for threshold amounts and minimum transfer amounts, it strikes a balance between risk management and operational efficiency.

Treatment of Collateral and Dispute Resolution

The directive delineates guidelines for collateral eligibility and treatment, ensuring robust risk management practices. Additionally, it mandates dispute resolution mechanisms, fostering transparency and expeditious conflict resolution.

Compliance with Foreign Jurisdiction Requirements

An innovative aspect is the provision for compliance with margin requirements of foreign jurisdictions, contingent upon a comparative assessment of regulatory frameworks. This provision underscores the directive’s adaptability to global standards while safeguarding domestic interests.

Obligation to Provide Information

Lastly, the directive mandates entities to furnish information sought by the RBI, underscoring regulatory oversight and transparency.