Prudential Norms for Off Balance Sheet Exposure-Bilateral netting of counterparty credit exposures
DBOD.FID.FIC.No 8 /01.02.00 /2010-11
November 2 , 2010
The CEOs of select All-India Term Lending and Refinancing Institutions
(Exim Bank, NABARD, NHB and SIDBI)
Prudential Norms for Off Balance Sheet Exposure-Bilateral netting of
counterparty credit exposures
Please find enclosed circular DBOD No. BP .BC .48 / 21.06.001 / 2010-11 dated October 1, 2010 on the above subject. In this connection, it is advised that the above guidelines issued to banks, shall mutatis mutandis apply to the select All-India Financial Institutions (AIFIs)
Chief General Manager
Note : Circular no DBOD No. BP .BC .48 / 21.06.001 / 2010-11 dated October 1, 2010 is mentioned below.
Prudential Norms for Off-Balance Sheet Exposures of Banks – Bilateral netting of counterparty credit exposures
DBOD.No.BP.BC.48 / 21.06.001/2010-11
October 1, 2010
All Scheduled Commercial Banks
(Excluding Local Area Banks and Regional Rural Banks)
Prudential Norms for Off-Balance Sheet Exposures of Banks –
Bilateral netting of counterparty credit exposures
As you are aware, in terms of our extant instructions issued vide our Master Circular – ‘Prudential Guidelines on Capital Adequacy and Market Discipline - New Capital Adequacy’, DBOD,No,.BP.BC.15 / 21.06.001 / 2010 - 11 dated July 1, 2010, banks have been advised to adopt ‘Current Exposure Method’ for estimating their credit equivalent amount for interest rate and foreign exchange derivative transactions and gold. The credit equivalent amount is used for the purposes of capital adequacy and exposure norms.
2. On receipt of requests from banks, the issue of allowing bilateral netting of counterparty credit exposures, in such derivative contracts, has been examined within the existing legal framework. Since the legal position regarding bilateral netting is not unambiguously clear, it has been decided that bilateral netting of mark-to-market (MTM) values arising on account of such derivative contracts cannot be permitted. Accordingly, banks should count their gross positive MTM value of such contracts for the purposes of capital adequacy as well as for exposure norms.
Chief General Manager-in-Charge