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RBI proposes margins on non- centrally cleared derivatives

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The Reserve Bank of India ( RBI) on Monday proposed to charge margins on over- the- counter derivatives not cleared by a central counter- party.
A central counter- party like Clearing Corporation of India Ltd ( CCIL) takes margins from both parties and guarantees a deal. In the absence of this, parties entering into a contract set aside margins between themselves after signing standardised agreements.
India is part of an effort to set global standards to ‘ ring- fence’ the economy from risky derivatives that encourage excessive and opaque risk- taking. By these standards, all over- thecounter derivatives should be traded on exchanges, if possible, or such contracts should be cleared by a central counterparty.
So, non- centrally cleared derivatives should be subjected to higher capital requirements and attract margin requirements.
Apart from de- risking the system, this will also promote central clearing, RBI’s discussion paper said. “ For the time being, it is proposed to apply the margin requirements, in a phased manner, to all financial entities ( like banks, insurance companies, mutual funds, etc) and certain large non- financial entities. The latter will, for this purpose, be entities having aggregate notional amount of outstanding non- centrally cleared derivatives at or more than Rs.1 lakh crore, at a consolidated groupwide basis.” The exchange of initial margin will be applied with a threshold of Rs.350 crore, made applicable on a consolidated group level. There are many such instruments that are cleared through CCIL but also without involving a counterparty.
For example, currency and interest rate swaps might or might not involve a central counter- party, said a person who worked closely with CCIL on such derivatives. Such noncentrally cleared derivatives can include various forms of interest rate swaps ( like overnight index swaps), foreign currency swaps ( for example, dollar interest rate swaps), etc. In India, all interbank foreign exchange forwards are cleared through a central counter- party, while banks are not permitted to transact in equity and commodity derivatives.
Business Standard New Delhi,3rd May2016

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