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Informist, Wednesday, Oct. 7, 2026

--RBI issues Standardised Approach for Counterparty Credit Risk final norms 

--RBI: New counterparty credit risk norms effective Apr 1 

NEW DELHI – The Reserve Bank of India on Wednesday issued a framework for calculating counterparty credit risk for banks, introducing a more detailed standardised methodology for derivatives exposures and strengthening the treatment of collateral, netting arrangements and central counterparty exposures. The revised norms will come into effect from Apr. 1, and will apply to commercial banks with an international presence or those with derivative outstanding book value of INR 250 billion and above, on a consolidated group-wide basis. Other commercial banks will have the option to continue using the current exposure method or adopt the standardised approach for counterparty credit risk.

On Jun. 10, the RBI had released draft directions on a Standardised Approach for Counterparty Credit Risk for banks, nearly a decade after the proposed implementation of these guidelines was deferred. The RBI had invited public comments on the draft directions on Standardised Approach for Counterparty Credit Risk by Jul. 1.

The key change is the move towards Standardised Approach for Counterparty Credit Risk for applicable banks for measuring exposures arising from over-the-counter, exchange-traded derivatives, securities financing transactions, and long-settlement transactions. The methodology calculates exposure using replacement cost and potential future exposure, with the framework taking greater account of margins, collateral, maturity and the underlying risk characteristics of transactions.

The RBI has also substantially expanded the rules governing exposure to central counterparties. The revised framework defines the treatment of clearing members, clients, initial margin, variation margin and default-fund exposures, and lays down separate capital treatment for exposures to qualifying central counterparties.

Central counterparty is a clearing house that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts. A central counterparty becomes counterparty to trades with market participants through novation, an open offer system, or another legally binding arrangement. 

Another important change relates to netting of derivative transactions. Banks will have to ensure that netting arrangements are legally enforceable and supported by appropriate legal reviews. Cross-product netting between derivatives and securities financing transactions will not be recognised under Standardised Approach for Counterparty Credit Risk for regulatory capital purposes.

The framework also provides detailed rules for calculating potential future exposure across five asset classes — interest rates, foreign exchange, credit, equity and commodities — with specific hedging sets and aggregation methodologies.

RBI has further introduced new disclosure, requiring banks to provide greater transparency on counterparty credit risk management, exposure calculations, collateral, credit derivatives and exposures to central counterparties. The disclosures will include information on replacement cost, potential future exposure, exposure at default and risk-weighted assets. The central bank said the amendments were being introduced following a review of the existing framework and to ensure greater alignment with international standards. 

"A bank shall determine the primary risk factor or factors for each transaction and attribute them to one or more of the five asset classes, including interest rate, foreign exchange, credit, equity, and commodity," RBI said. "The add-on for each asset class is calculated using asset-class specific formulas."

Further, the RBI said that a bank will group derivative transactions that reference the basis between two risk factors and are denominated in a single currency into separate hedging sets within the corresponding asset class. Derivatives with two floating legs that are denominated in different currencies will not be subject to this treatment; instead, they should be treated as non-basis foreign exchange contracts. A bank will have a separate hedging set for each pair of risk factors and will determine the long and short positions within the hedging set with respect to the basis. For hedging sets consisting of basis transactions, the supervisory factor applicable to a given asset class must be multiplied by one-half, the central bank said.

According to RBI norms, the bank will not make any modelling assumptions in the calculation of the potential future exposure add-on, including estimating volatilities or taking publicly available estimates of beta. Therefore, it will only use the two values of supervisory factors that are defined for equity derivatives, one for single entities and one for indices.

Further, the bank is not permitted to engage in transactions in commodity derivatives. Hence, this instruction is applicable only with respect to counterparty credit risk exposure that arises when a bank acts as clearing member of an exchange in the commodity derivatives segment, subject to the applicable RBI guidelines.

For any assets posted as collateral by a bank, the bank will also apply the appropriate capital treatment that otherwise applies to such assets under the capital adequacy framework, as if they had not been posted as collateral, RBI said. That is, collateral posted must receive the banking book or trading book treatment it would have received if it had not been posted to the central counterparty, it said.  End

Reported by Vaishali Tyagi 

Edited by Avishek Dutta

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