The Reserve Bank of India released draft guidelines for banks? capital adequacy in terms of their exposure to central counter-parties (CCP) such as Clearing Corp of India.
RBI has said banks will have to maintain adequate capital with regards to their exposure to CCPs to protect potential risks that arise from the CCP.
?Exposures to central counterparties arising from OTC derivatives, exchange traded derivatives transactions and SFTs will be subject to the counterparty credit risk treatment,? RBI said in draft guidelines.
A CCP typically acts as a buffer to the risk that a institution faces through exposure to the capital markets.
When the clearing member-to-client leg of an exchange traded derivatives transaction is conducted under a bilateral agreement, both the client bank and the clearing member are to capitalise that transaction as an OTC derivative, the RBI said.
Banks must hold additional capital over and above the minimum required if the need arises from their exposure to CCPs, the central bank added. A bank must conduct stress tests to arive at the adequacy of the capital it holds towards its exposure to CCPs. Barring CCIL, banks must compute mark-to-market cost for guaranteed settlement on a gross basis.
Where a bank acts as a clearing member of a CCP for its own purposes, a risk weight of 2% must be applied to the bank?s trade exposure to the CCP in respect of OTC derivatives, exchange traded derivative transactions, RBI said.
