Prudential Norms for Off Balance Sheet Exposure-Bilateral netting of counterparty credit exposures

Prudential Norms for Off Balance Sheet Exposure-Bilateral netting of counterparty credit exposures

RBI/2010-11/258
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)

Dear Sir,

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)

Yours faithfully,

(Vinay Baijal)
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

RBI/2010-11/223
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)

Dear Sir,

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.

Yours faithfully,

(B Mahapatra)
Chief General Manager-in-Charge