RBI Draft Counterparty Credit Risk Framework for Banks
Why in the news
The RBI put out draft norms on how banks should measure counterparty credit risk (CCR) on derivatives and how much capital they must hold against exposure to central counterparties (CCPs), bringing India closer to Basel III.
Key facts
- Issuer: Reserve Bank of India; subject: CCR framework for banks.
- Comments window: up to 1 July 2026.
- Effective date: 1 April 2027.
- The draft clarifies the scope of CCR across banking and trading book exposures, handling of multiple margin agreements and netting sets, and clearing at SEBI-recognised exchanges.
Transactions covered
| Category | Note |
|---|---|
| OTC derivatives | Includes repo-style and other trading-book deals, kept apart from market risk capital |
| Exchange-traded derivatives | Cleared through a CCP |
| Securities financing transactions | Such as repos and securities lending |
| Long-settlement transactions | Banking book |
Background concepts
- CCR: the danger that the other party to a deal defaults before final settlement. Unlike a loan, the exposure is two-way and uncertain because contract value moves over time.
- Derivative: a contract whose value comes from an underlying asset; types are forwards (customised), futures (standardised, exchange-traded), options (right but no obligation) and swaps (exchange of cash flows).
- OTC vs exchange-traded: OTC deals are private and customised with bilateral risk and higher CCR; exchange-traded ones are standardised and cleared by a CCP, so CCR is lower.
- CCP: a clearing house acting as buyer to every seller and seller to every buyer (novation). Indian examples: CCIL, NSCCL, ICCL and MCXCCL.
- Banking book vs trading book: the first holds items to maturity (credit risk capital); the second holds items for trading (market risk capital).
- Netting set: transactions with one counterparty that can be legally offset. Margin agreement: contract requiring collateral to secure obligations.
- Basel standards from the Basel Committee: Basel I (1988) on credit risk, Basel II (2004) adding market and operational risk with three pillars, Basel III (2010 onwards) tightening capital, liquidity and leverage after the 2008 crisis, including CCR.
Exam angle
- Dates to recall: feedback till 1 July 2026; effective 1 April 2027.
- Related terms: CCP, netting set, novation, Basel III, BCBS.
- CCIL clears G-secs and forex; MCXCCL clears commodities.