Informist, Wednesday, Jul. 9, 2025

--RBI releases draft norms on novation of OTC derivative contracts

--RBI seeks comments on draft norms on novation of OTC derivatives by Aug 1

NEW DELHI – The Reserve Bank of India Wednesday released draft norms on the novation of over-the-counter derivative contracts. The central bank has sought comments on the draft norms by Aug. 1.

Novation means the replacement of a market maker with another market maker in an over-the-counter derivative contract between two counterparties, with a new contract drawn up between the replacement and the remaining counterparty. It is currently governed by an RBI circular from December 2013.

"The provisions of the circular have been reviewed in the light of changes in the overall regulatory framework governing OTC derivatives since 2013 and the market feedback received as well as with a view to rationalising the related regulatory requirements," the RBI said.

The draft norms do away with clauses requiring the original market maker to hold the contract for a period of time. The guidelines will apply to novation in over-the-counter derivative contracts and not novation undertaken by a central counterparty or pursuant to a merger, according to the draft norms. This would discount the novation of interest rate swaps linked to the Mumbai Interbank Offered Rate, which is India's largest rupee derivative market. Novation in bond forward-rate agreements and foreign exchange derivatives may be governed by the norms.

Novation can only be done with the consent of the remaining party, and the transaction shall be undertaken at prevailing market rates, as per the draft norms. On the date of novation, the transferor of the over-the-counter contract and the transferee shall exchange the amount for the mark-to-market value of the derivative. Both parties will be bound by the governing directions in the RBI's norms on foreign exchange management, rupee interest rate derivatives, and credit derivatives, among others.

All parties to the novation--the transferor, the transferee, and the remaining counterparty--shall enter into a tripartite agreement where the original market maker steps out and the new one steps in to "face" the remaining counterparty, according to the draft norms. The original contract shall be extinguished and a new one with identical terms and parameters made. The new contract must ensure that the counterparty credit risk and market risk arising from the contract changes from the transferor to the transferee.

"The transferor and the remaining party are each released from their obligations under the original transaction to each other and their respective rights against each other are cancelled," as per the RBI draft. "These rights and obligations identical in their terms to the original transaction are reinstated in the new transaction between the remaining party and the transferee."

The fees and settlement terms between the transferor and transferee shall not be added in the novation agreement but can be agreed upon bilaterally. Documentation relevant to the derivative contract and underlying exposure must be transferred between the two parties. Industry bodies Fixed Income Money Market and Derivatives Association of India and Foreign Exchange Dealers' Association of India shall devise standard agreements for novation, the draft norms said. End

Reported by Aaryan Khanna

Edited by Rajeev Pai

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2025. All rights reserved.