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Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)

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 banks?

The extant risk mitigation measures were based on T+2 rolling settlement for equities (T being the Trade day). The extant guidelines on issuance of IPCs by banks have been reviewed and the guidelines for T+1 rolling settlement have been issued. The extant instructions continue to remain valid for T+2 settlement cycle.

Guidelines for T+2 settlement cycle Guidelines for T+1 settlement cycle
Only those custodian banks, would be permitted to issue IPCs, who have a clause in the Agreement with their clients which gives them an inalienable right over the securities to be received as pay out in any settlement. However, this clause will not be insisted upon in cases where transactions are pre-funded i.e. there are clear INR funds in the customer’s account and, in case of FX deals, the bank’s nostro account has been credited before the issuance of the IPC by custodian banks. Only those custodian banks will be permitted to issue IPCs, who have a clause in the Agreement with clients giving the banks an inalienable right over the securities to be received as pay out in any settlement. However, this clause will not be insisted upon if the transactions are pre-funded i.e., either clear INR funds are available in the customer’s account or, in case of FX deals, the bank’s nostro account has been credited before the issuance of the IPC.
The maximum risk to the custodian banks issuing IPCs would be reckoned at 50%, on the assumption of downward price movement of the equities bought by FIIs / Mutual Funds on the two successive days from the trade date (T) i.e., on T+1 and T+2, of 20% each with an additional margin of 10% for further downward movement. The maximum intraday risk to the custodian banks issuing IPCs would be reckoned as CME at 30% of the settlement amount. This is based on the assumption of 20% downward price movement of the equities on T+1, with an additional margin of 10% for further downward movement of price.
The potential risk on T+1 would be reckoned at 50% of the settlement amount and this amount would be reckoned as CME at the end of T+1 if margin payment / early pay in does not come in. Under T+1 settlement cycle, the exposure shall normally be for intraday. However, in case any exposure remains outstanding at the end of T+1 Indian Standard Time, capital will have to be maintained on the outstanding CME in terms of the Master Circular – Basel III Capital Regulations dated April 01, 2024, as amended from time to time.
In case there is early pay in on T+1, there will be no CME. T+1 means ‘end of day’ (EOD) as per Indian Time. Thus, funds received after EOD as per Indian Time, will not be reckoned as early pay-in on T+1. CME will have to be computed accordingly.
In case margin is paid in cash on T+1, the CME would be reckoned at 50% of settlement price minus the margin paid. In case margin is paid on T+1 by way of permitted securities to FIIs / Mutual Funds, the CME would be reckoned at 50% of settlement price minus the margin paid plus haircut prescribed by the Exchange on the securities tendered towards margin payment. In case margin is paid in cash, the exposure will stand reduced by the amount of margin paid. In case margin is paid by way of permitted securities to Mutual Funds / FIIs, the exposure will stand reduced by the amount of margin after adjusting for haircut as prescribed by the Exchange on the permitted securities accepted as margin.
The IPC will be treated as a financial guarantee with a Credit Conversion Factor (CCF) of 100. However, capital will have to be maintained only on exposure which is reckoned as CME and the risk weight would be 125% thereon. The underlying exposures of banks to their counterparties, emanating from the intraday CME, will be subject to limits prescribed under Large Exposure Framework dated June 3, 2019, as amended from time to time.


References

Reserve Bank of India. (2007, December 14). 'Loans/advances to MFs to be included in Banks’ Capital Market Exposure'. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=3978&Mode=0

Reserve Bank of India. (2010, September 30). 'Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6020&Mode=0

Reserve Bank of India. (2010, October 28). 'Issue of Irrevocable Payment Commitments'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6061&Mode=0

Reserve Bank of India. (2011, December 27). 'Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6903&Mode=0

Reserve Bank of India. (2012, March 30). 'Foreign Exchange Management (Guarantees) (Amendment) Regulations, 2010'. Retrieved from https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=7861&Mode=0

Reserve Bank of India. (2024, May 03). 'Banks' Exposure to Capital Market - Issue of Irrevocable Payment Commitments (IPCs)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12681&Mode=0


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