The Reserve Bank of India on 16th June 2022, has notified the Draft Reserve Bank of India (Margining for Non-Centrally Cleared OTC Derivatives) Directions, 2022 which includes consolidated provisions for both variation and initial margin.
As per the draft amendment, the definition for the term initial margin has been notified as follows:
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.
The Initial margin shall be calculated at the outset of a transaction and thereafter on a regular and consistent basis upon changes in the potential future exposure including, but not limited to, when trades are added to or subtracted from the portfolio, on occurrence of a significant market disruption, and when the Initial Margin model (if applicable) is recalibrated.
Initial Margin collected from counterparties shall be maintained in a manner such that:
- the margin collected is available to the collecting party on a timely basis following a default by the posting party; and
- the margin collected is subject to legally enforceable collateral arrangements that protect the posting party to the extent possible under applicable law in the event that the collecting party enters insolvency or bankruptcy.
Initial Margin collected shall be segregated from the proprietary assets of the collecting party by either placing the Initial Margin with a third-party custodian or through other legally effective arrangements. In addition, the collecting party shall also provide the posting party with the option to segregate the Initial Margin that it posts from the assets of all other counterparties.
Further a new para 4.2 which deals with Covered Entities for exchange of Initial Margin has been inserted as follows:
The following entities shall be classified as Domestic Covered Entities for exchange of Initial Margin (hereafter known as Domestic Covered Entities – IM) under these Directions:
- Entities regulated by a financial sector regulator (including branches of foreign banks operating in India) and having an Average Aggregate Notional Amount (AANA) of outstanding NCCDs of ₹60,000 crore and above, on a consolidated group wide basis.
(2) The following entities shall be classified as Foreign Covered Entities for exchange of Initial Margin (hereafter known as Foreign Covered Entities – IM) under these Directions:
- Non-resident financial entities having an AANA of outstanding NCCDs of USD 8 billion and above, on a consolidated group wide basis.
