The Reserve Bank of India has announced a comprehensive overhaul of its capital framework for commercial banks’ derivative trading, incorporating Basel III standards with phased implementation from April 2027.
The Reserve Bank of India has moved to overhaul how commercial banks account for the risk of losses on derivative trades, proposing a capital framework that would replace rules in place since 2011 and bring the country closer to the latest Basel III standards. According to Business Standard, the draft would take effect on 1 April 2027 and would apply to all commercial banks apart from small finance banks, payments banks and local area banks.
At the heart of the proposal is credit valuation adjustment, or CVA, the charge banks recognise for the possibility that a counterparty on a derivative contract may fail to pay. Under the draft, banks would have to calculate the CVA capital charge using the basic approach, with a choice of either a full or reduced version. The reduced version would not allow banks to recognise hedges against CVA risk, while the full version would permit eligible hedges, such as single-name and index credit default swaps, if they meet the RBI’s conditions.
The central bank has also proposed relief for smaller derivatives books. Banks with aggregate notional non-centrally cleared derivatives of ₹10 trillion or less would be able to bypass the full BA-CVA calculation and instead set the CVA capital charge at 100% of their counterparty credit risk capital requirement. Even so, the RBI’s supervisors would retain the power to block that simplified treatment if they judged CVA risk to be material to a bank’s broader risk profile.
The draft also introduces a more detailed supervisory weighting system for counterparties, splitting them by sector and credit quality into investment-grade, high-yield and not-rated categories. Financial-sector counterparties would attract a 5% weight for investment-grade names and 12% for others, while sovereigns would be assigned the lowest rates, at 0.5% and 2%. The proposal forms part of a wider RBI drive to modernise capital rules across the banking system, with other Basel-linked changes already moving towards implementation from April 2027, including revisions to credit risk, foreign exchange exposure and provisioning norms.
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