Inquisitive Mind

Reserve Bank of India (RBI) has issued draft directions for Electronic Trading Platforms (ETPs). What is Electronic Trading Platform (ETP)? Electronic Trading Platform (ETP) shall mean any electronic system, other than a recognised stock exchange, on which transactions in eligible instruments are contracted. What are Eligible Instruments? Eligible Instruments shall mean securities, money market instruments, foreign exchange instruments, derivatives, or other instruments of like nature, as may be specified by RBI under section 45W of Chapter III-D of RBI Act, 1934. To whom shall the directions be applicable? The directions are issued to the entities operating ETPs on which transactions in eligible instruments are contracted. The directions shall not apply to electronic systems operated by scheduled commercial banks and standalone primary dealers for transactions in eligible instruments wherein the bank or the primary dealer operating the electronic system is the sole quote / price provi...

Reserve Bank of India (RBI) has issued directions on Asset Reconstruction Companies (ARCs). What are Asset Reconstruction Companies (ARCs)? Asset Reconstruction Companies (ARCs) acquire the non-performing assets (NPAs) from banks or financial institutions along with the underlying securities mortgaged and / or hypothecated by the borrowers to the lenders. The ARCs then try and manage or resolve these NPAs acquired from banks or financial institutions. To whom shall the directions be applicable? The directions shall apply to every ARC registered with RBI under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the Act). What are the guidelines on registration of ARCs? Before commencement of the business of securitisation or asset reconstruction, an ARC shall obtain a certificate of registration (CoR) from RBI as per Section 3 of the Act. An ARC shall commence business within 6 months from the date of grant of CoR. RBI m...

Reserve Bank of India (RBI) has issued directions on margining for non-centrally cleared over-the-counter (OTC) derivatives. What is derivative? Derivative means a financial contract, to be settled at a future date, whose value is derived from one or more financial, or non-financial variables. What are over-the-counter (OTC) derivatives? Over-the-counter (OTC) derivatives are the contracts that are traded directly between two eligible parties, with or without the use of an intermediary and without going through an exchange. What are non-centrally cleared derivatives (NCCDs)? Non-centrally cleared derivatives (NCCDs) mean derivative contracts whose settlement is not guaranteed by a central counterparty. Central counterparty means an entity 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 performance of open contracts. From when shall the directions...

Reserve Bank of India (RBI) has updated the guidelines on issuance of Irrevocable Payment Commitments (IPCs) by banks. What are Irrevocable Payment Commitments (IPCs)? Irrevocable Payment Commitment (IPC) means irrevocable confirmation issued by the custodian bank in favour of a stock exchange / clearing corporation of a stock exchange on behalf of its customers, to meet the payment obligation arising out of a 'buy' transaction. Why does IPCs issued by banks forms part of capital market exposure? Banks issue IPCs to various stock exchanges on behalf of Mutual Funds and Foreign Institutional Investor (FIIs) to facilitate the transactions done by these clients. IPCs are in the nature of non-fund based credit facility for purchase of shares and are treated at par with guarantees issued for the purpose of capital market operations. Such exposure of banks, therefore, forms part of their Capital Market Exposure (CME).  What are the guidelines on recognition of CME for IPCs issued by...

Reserve Bank of India (RBI) has issued the directions on posting and collection of margins for permitted derivative contracts between a person resident in India and a person resident outside India. What is derivative? Derivative means a financial contract, to be settled at a future date, whose value is derived from one or more financial, or non-financial variables. What is margin? A margin is a collateral that the holder of a financial instrument has to deposit to cover the risk of their counterparty. Initial margin – Initial margin means the collateral that is collected to cover the potential future exposure that could arise from future changes in the market value of a derivative contract during the time it takes to close out and / or replace the position in the event of a counterparty default. Variation margin – Variation margin means the collateral that is collected or paid to reflect the current mark-to-market exposure resulting from changes in the market value of a derivative co...

Reserve Bank of India (RBI) has directed the regulated entities to ensure fairness and transparency in charging of interest. What unfair practices were observed by RBI? Some of the unfair practices observed by RBI during the course of the onsite examination of regulated entities (REs) for the period ended March 31, 2023 are given below. Charging of interest from the date of sanction of loan or date of execution of loan agreement and not from the date of actual disbursement of the funds to the customer.  In the case of loans being disbursed by cheque, instances were observed where interest was charged from the date of the cheque whereas the cheque was handed over to the customer several days later. In the case of disbursal or repayment of loans during the course of the month, some REs were charging interest for the entire month, rather than charging interest only for the period for which the loan was outstanding. In some cases, it was observed that REs were collecting one or more in...