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Margin for Derivative Contracts

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 contract.

To which entities are the directions on margin for derivative contracts applicable?

The directions shall apply to –

  • Authorised Dealer Category-I (AD Cat-I) banks 
  • Authorised Dealer Category – III Standalone Primary Dealers (AD Cat-III SPDs)

For the purpose of the directions, Authorised Dealers shall mean AD Cat-I banks and AD Cat-III SPDs.

Who can post and collect margin on derivative contracts?

Authorised Dealers may –

  • Post and collect margin, in India and outside India, for a permitted derivative contract entered into with a person resident outside India and receive and pay interest on such margin.
  • Post and collect margin, in India and outside India, for derivative transactions of their overseas branches and IFSC Banking Units and receive and pay interest on such margin.

Authorised Dealer Category-I banks may –

  • Post and collect margin, in India and outside India, on behalf of their customers for a permitted derivative contract entered into with a person resident outside India and receive and pay interest on such margin.

Which are permitted derivative contracts?

Permitted derivative contract means –

  • Foreign Exchange Derivative Contract 
  • Interest Rate Derivative Contract
  • Credit Derivative Contract 

In what form shall the margin be posted and collected?

Margin posted and collected in India Margin posted and collected outside India
  • Indian currency
  • Freely convertible foreign currency
  • Debt securities issued by Indian Central Government and State Governments
  • Rupee bonds issued by persons resident in India which are –
    • Listed on a recognized stock exchange in India
    • Assigned a credit rating of AAA issued by a rating agency registered with Securities and Exchange Board of India (SEBI)
  • Certificate of Deposits
  • Commercial Papers which are assigned a minimum credit rating of A1 issued by a rating agency registered with SEBI
  • Freely convertible foreign currency
  • Debt securities issued by foreign sovereigns with a credit rating of AA- and above issued by S&P Global Ratings / Fitch Ratings or Aa3 and above issued by Moody’s Investors Service

 
If different ratings are accorded by two or more credit rating agencies, then the lowest rating shall be reckoned.

What are the directions on margin requirements for 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.

In case of Authorised Dealers choosing to comply with the margin requirements of a foreign jurisdiction for NCCD transactions with a person resident outside India or for NCCD transactions between two Authorised Dealers, at least one of which is a branch of a foreign bank.

  • Authorised Dealer may post and collect margin outside India, and receive and pay interest on such margin in the form and manner permitted by the laws and regulations of the foreign jurisdiction.
  • Posting and collection of margin and receipt and payment of interest on such margin may be undertaken by the Authorised Dealer or by its overseas branches or head office (including its overseas branches) as part of a global margin arrangement.

Where the account shall be maintained for posting and collecting margin?

Authorised Dealer Category-I banks shall maintain a separate interest-bearing account in Indian Rupees and / or foreign currency in the name of persons resident outside India for the purpose of posting and collecting cash margin in India, and transactions incidental thereto.


References

Reserve Bank of India. (2000, May 03). 'Foreign Exchange Management (Permissible capital account transactions) Regulations, 2000 (Amended up to February 27, 2019)'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=155&Mode=0

Reserve Bank of India. (2020, October 23). 'Foreign Exchange Management (Margin for Derivative Contracts) Regulations, 2020'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12097&Mode=0

Reserve Bank of India. (2021, June 04). 'Master Direction – Reserve Bank of India (Certificate of Deposit) Directions, 2021'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12108

Reserve Bank of India. (2024, May 06). 'Foreign Exchange Management (Deposit) (Fourth Amendment) Regulations, 2024'. Retrieved from https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12684&Mode=0

Reserve Bank of India. (2024, May 08). 'Margin for Derivative Contracts'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12683&Mode=0

Reserve Bank of India. (2024, January 03). 'Master Direction – Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity upto one year) Directions, 2024'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12592

Reserve Bank of India. (2024, May 08). 'Master Direction – Reserve Bank of India (Margining for Non-Centrally Cleared OTC Derivatives) Directions, 2024'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12682


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