All Scheduled Commercial Banks
(Excluding Regional Rural Banks)
Please refer to the paragraph 3
of the Statement on Developmental and Regulatory Policies issued by RBI on
October 4, 2016 (extract enclosed). It was
indicated therein that RBI will issue final guidelines on Large Exposure
Framework (LEF) by end-October, 2016. Accordingly, the final guidelines are annexed.
2. The LEF will be effective
from April 1, 2019.
(S. S. Barik)
Chief General Manager-in-Charge
from Statement on Developmental and Regulatory Policies
dated October 4, 2016
3. Large Exposure Framework - In order to align the exposure norms for Indian
banks with the BCBS standards, and based on comments and feedback received
on the Discussion Paper on the Large Exposures Framework, a Draft Large
Exposures (LE) Framework was issued on August 25, 2016 for public comments.
The comments/feedback received from stakeholders on the draft proposals
will be examined and the final guidelines will be issued by end-October
2016 for full implementation by March 31, 2019.
1.1 A bank’s exposures to its
counterparties may result in concentration of its assets to a single
counterparty or a group of connected counterparties. As a first step to
address the concentration risk, the Reserve Bank, in March 1989, fixed
limits on bank exposures to an individual business concern and to business
concerns of a group. RBI’s prudential exposure norms have evolved since
then and a bank’s exposure to a single borrower and a borrower group is
currently restricted to 15 percent and 40 percent of capital funds
respectively. A comprehensive policy framework on the subject is
consolidated in the Master Circular – Exposure Norms/Master Direction -
Prudential Norms on Banks’ Exposures.
1.2 In January 1991, the Basel
Committee on Banking Supervision (BCBS) issued supervisory guidance on
large exposures, viz., Measuring and Controlling Large Credit Exposures.
Further, the Core Principles for Effective Banking Supervision (Core
Principle 19), published by BCBS in October 2006 (since revised in
September 2012) prescribed that local laws and bank regulations set prudent
limits on large exposures to a single borrower or a closely related group
of borrowers. In order to foster a convergence among widely divergent
national regulations on dealing with large exposures, the BCBS issued the
Standards on ‘Supervisory framework for measuring and controlling large
exposures’ in April 2014. The Reserve Bank has decided to suitably adopt
these standards for banks in India and, accordingly, the instructions on
banks' Large Exposures (LE) is described in the following paragraphs.
2. Scope of application
2.1 Banks must apply LEF at the
same level as the risk-based capital requirements are applied, that is, a
bank shall comply with the LEF norms at two levels: (a) consolidated (Group1) level and (b) Solo2 level.
2.2 The application of the LEF
at the consolidated level implies that a bank must consider exposures of
all the banking group entities (including overseas operations through
branches and subsidiaries), which are under regulatory scope of
consolidation, to counterparties and compare the aggregate of those
exposures with the banking group’s eligible consolidated capital base.
3. Scope of counterparties and
3.1 Under the LEF, a bank’s
exposure to all its counterparties and groups of connected counterparties,
excluding the exposures listed below3, will be considered for
exposure limits. The exposures that will be exempted from the LEF are
a. Exposures to the Government
of India and State Governments which are eligible for zero percent Risk
Weight under the Basel III – Capital Regulation framework of the Reserve
Bank of India;
b. Exposures to Reserve Bank of
c. Exposures where the principal
and interest are fully guaranteed by the Government of India;
d. Exposures secured by
financial instruments issued by the Government of India, to the extent that
the eligibility criteria for recognition of the credit risk mitigation
(CRM) are met in terms of paragraph 7.III of this circular;
e. Intra-day interbank
f. Intra-group exposures4;
g. Borrowers, to whom limits are
authorised by the Reserve Bank for food credit;
h. Banks’ clearing activities
related exposures to Qualifying Central Counterparties (QCCPs), as detailed
in paragraph 10.I of this circular;
i. Rural Infrastructure
Development Fund (RIDF) deposits placed with NABARD.
3.2 However, a bank’s exposure
to an exempted entity which is hedged by a credit derivative shall be
treated as an exposure to the counterparty providing the credit protection
notwithstanding the fact that the original exposure is exempted.
3.3 All exempted exposures must
be reported by a bank as required under regulatory reporting specified in
paragraph 4.2 below, if these exposures meet the criteria for definition of
a ‘Large Exposure’ as per para 4.1 below.
4. Definition of a large
exposure and regulatory reporting
4.1. Under the LEF, the sum of
all exposure values of a bank (measured as specified in paragraphs 7, 8, 9
and 10 of this framework) to a counterparty or a group of connected
counterparties (as defined in paragraph 6 below) is defined as a ‘Large
Exposure(LE)’, if it is equal to or above 10 percent of the bank’s eligible
capital base (i.e., Tier 1 capital as specified in paragraph 5.3 below).
4.2. Banks shall report their
Large Exposures to the Reserve Bank of India (RBI), Department of Banking
Supervision, Central Office, (DBS, CO), as per the reporting template given
in Appendix 2. The reporting,
inter-alia, will include the following:
(i) all exposures, measured as
specified in paragraphs 7, 8, 9 and 10 of this framework, with values equal
to or above 10 percent of the bank’s eligible capital (i.e., meeting the
definition of a large exposure as per para 4.1 above);
(ii) all other exposures,
measured as specified in paragraphs 7, 8, 9 and 10 of this framework
without the effect of credit risk mitigation (CRM), with values equal to or
above 10 percent of the bank’s eligible capital base;
(iii) all the exempted exposures
(except intraday inter-bank exposures) with values equal to or above 10
percent of the bank’s eligible capital base;
(iv) 20 largest exposures
included in the scope of application, irrespective of the values of these
exposures relative to the bank’s eligible capital base.
5. The Large Exposure limits
5.1 Single Counterparty: The sum of all the exposure values of a bank to a
single counterparty must not be higher than 20 percent of the bank’s
available eligible capital base at all times. In exceptional cases, Board
of banks may allow an additional 5 percent exposure of the bank’s available
eligible capital base. Banks shall lay down a Board approved policy in this
5.2 Groups of Connected
Counterparties: The sum of all the
exposure values of a bank to a group of connected counterparties (as
defined in paragraph 6 of this circular) must not be higher than 25 percent
of the bank’s available eligible capital base at all times.
5.3 The eligible capital base
for this purpose is the effective amount of Tier 1 capital fulfilling the
criteria defined in Master Circular on Basel III – Capital Regulation /
Master Direction on ‘Basel III Capital Regulations’ as per the last audited
balance sheet.. Further, the exposures must be measured as specified in
paragraphs 7 -10 ibid.
5.4 However, the above LE limits
will be modulated in cases of certain counterparties as mentioned in
paragraph 10 ibid.
5.5 Any breach of the above LE
limits shall be under exceptional conditions only and shall be reported to
RBI (DBS, CO) immediately and rectified at the earliest but not later than
a period of 30 days from the date of the breach.
6. Definition of connected
6.1 In some cases, a bank may
have exposures to a group of counterparties with specific relationships or
dependencies such that, were one of the counterparties to fail, all of the
counterparties would very likely fail. A group of this sort, referred to in
this framework as a group of connected counterparties, must be treated as a
single counterparty. In this case, the sum of the bank’s exposures to all
the individual entities included within a group of connected counterparties
is subject to the large exposure limit and to the regulatory reporting
requirements as specified above.
6.2 Two or more natural or legal
persons shall be deemed to be a group of connected counterparties if the
control criteria is satisfied i.e., one of the counterparties, directly or
indirectly, has control over the other(s).
6.3 Banks must assess the
relationship amongst counterparties with reference to the above criteria in
order to establish the existence of a group of connected counterparties. In
assessing whether there is a control relationship between counterparties,
banks must automatically consider that the control relationship criterion
(paragraph 6.2 above) is satisfied if one entity owns more than 50 percent
of the voting rights of the other entity. In addition, banks must assess
connectedness between counterparties based on control using the following
a. Voting agreements (e.g.,
control of a majority of voting rights pursuant to an agreement with other
b. Significant influence on the
appointment or dismissal of an entity’s administrative, management or
supervisory body, such as the right to appoint or remove a majority of
members in those bodies, or the fact that a majority of members have been
appointed solely as a result of the exercise of an individual entity’s
c. Significant influence on
senior management, e.g., an entity has the power, pursuant to a contract or
otherwise, to exercise a controlling influence over the management or
policies of another entity (e.g., through consent rights over key
6.4 Banks are also expected to
refer to criteria specified in the extant accounting standards for further
qualitative guidance when determining control.
6.5 Where control has been
established based on any of the above criteria, a bank may still
demonstrate to the RBI in exceptional cases, e.g., existence of control
between counterparties due to specific circumstances and corporate
governance safeguards, that such control does not necessarily result in the
entities concerned constituting a group of connected counterparties.
7. Values of exposures
7.I General measurement
7.1 Under the proposed LE
Framework, an exposure to a counterparty will constitute both on and
off-balance sheet exposures included in either the banking or trading book
and instruments with counterparty credit risk. Definitions and measurements
of such exposures are given in this section.
7.II Definitions of exposure
values under the LE Framework
7.2 Banking book on-balance
sheet non-derivative assets: The
exposure value is defined as the accounting value of the exposure5. As an alternative, a bank may
consider the exposure value gross of specific provisions and value
7.3 Banking book and trading
book OTC derivatives (and any other instrument with counterparty credit
risk): The exposure value for
instruments which give rise to counterparty credit risk and are not
securities financing transactions, should be determined as per the extant
instructions as prescribed by the Reserve Bank (on exposure at default) for
the counterparty credit risk6.
7.4 Securities financing
transactions (SFTs): Banks
should use the method they currently use for calculating their risk-based
capital requirements against SFTs.
7.5 Banking book “traditional”
off-balance sheet commitments: For
the purpose of the LEF, off-balance sheet items will be converted into credit
exposure equivalents through the use of credit conversion factors (CCFs) by
applying the CCFs set out for the Standardised Approach for credit risk for
risk-based capital requirements, with a floor of 10 percent.
7.III Eligible credit risk
mitigation (CRM) techniques
7.6 Eligible credit risk
mitigation techniques for LE Framework purposes are those that meet the
minimum requirements and eligibility criteria for the recognition of
unfunded credit protection7 and financial collateral
that qualify as eligible financial collateral under the Standardised
Approach for credit risk for risk-based capital requirement purposes.
7.7 Other forms of collaterals
that are only eligible under the Internal-Ratings based (IRB) Approach
(receivables, commercial and residential real estate and other collateral)
are not eligible to reduce exposure values for LEF purposes.
7.8 A bank must recognise an
eligible CRM technique in the calculation of an exposure whenever it has
used this technique to calculate the risk-based capital requirements,
provided it meets the conditions for recognition under the LEF.
7.9 Treatment of maturity
mismatches in CRM: In
accordance with provisions set out in the paragraphs 5.17 and 7 of ‘Master
Circular – Basel III Capital Regulations’, hedges with maturity mismatches
will be recognised only when their original maturities are equal to or
greater than one year and the residual maturity of a hedge is not less than
7.10 If there is a maturity
mismatch in respect of credit risk mitigants (collateral, on-balance sheet
netting, guarantees and credit derivatives) recognised in the risk-based
capital requirement, the adjustment of the credit protection for the
purpose of calculating large exposures will be determined using the same
approach as in the risk-based capital requirement8.
7.11 On-balance sheet netting: Where a bank has in place legally enforceable
netting arrangements for loans and deposits, it may calculate the exposure
values for LE purposes according to the calculation it uses for capital
requirements purposes – i.e., on the basis of net credit exposures subject
to the conditions set out in the approach to on-balance sheet netting in
the risk-based capital requirement9.
7.IV. Recognition of CRM
techniques in reduction of original exposure
7.12. Under the LEF, a bank may
reduce the value of the exposure to the original counterparty by the amount
of the eligible CRM technique (except for cases mentioned in paragraph 7.14
below) recognised for risk-based capital requirements purposes. This
recognised amount is:
value of the protected portion in the case of unfunded credit protection;
value of the collateral as recognized in calculation of the counterparty
credit risk exposure value for any instruments with counterparty credit
risk, such as OTC derivatives;
value of the collateral adjusted after applying the required haircuts, in
the case of financial collateral. The haircuts used to reduce the
collateral amount are the supervisory haircuts under the comprehensive
approach10 as specified under risk
based capital requirements.
7.V Recognition of exposures to
7.13 Where a bank reduces its
exposure to the original counterparty on account of an eligible CRM
instrument provided by another counterparty (CRM provider) with respect to
that exposure, it must also recognise an exposure to the CRM provider. The
amount assigned to the CRM provider will be the amount by which the
exposure to the original counterparty is reduced (except in the cases
defined in paragraph 7.14 below).
7.14 When the credit protection
takes the form of a credit default swap (CDS) and either the CDS provider
or the referenced entity is not a financial entity, the amount to be
assigned to the credit protection provider is not the amount by which the
exposure to the original counterparty is reduced but will be equal to the
counterparty credit risk exposure value calculated according to the
Standardised Approach – Counterparty Credit Risk (SA-CCR), once the
guidelines in the matter are finalised by the RBI. Till such time, the
banks may follow the extant method as prescribed by the RBI for the
counterparty credit risk in the Master Circular – Basel III Capital
For the purpose of this
paragraph, financial entities comprise:
financial institutions, defined as a parent and its subsidiaries where any
substantial legal entity in the consolidated group is supervised by a
regulator that imposes prudential requirements consistent with
international norms. These include, but are not limited to, prudentially
regulated insurance companies, broker/dealers, banks,;
financial institutions, defined as legal entities whose main business
includes: the management of financial assets, lending, factoring, leasing,
provision of credit enhancements, securitisation, investments, financial
custody, central counterparty services, proprietary trading and other
financial services activities identified by supervisors.
7.VI Calculation of exposure
value for Trading Book positions
7.15 A bank must add any
exposures to a counterparty arising in the trading book to any other
exposures to that counterparty that lie in the banking book to calculate
its total exposure to that counterparty. The exposures considered here
correspond to concentration risk associated with the default of a single
counterparty for exposures included in the trading book. Therefore, a
bank’s exposures to financial instruments issued by counterparties not
exempted under this Framework will be governed by the LE limit, but
concentrations in a particular commodity or currency will not be.
7.16 The exposure value of
straight debt instruments and equities will be equal to the market value of
7.17 Instruments such as swaps,
futures, forwards and credit derivatives12 must be converted into
positions following the risk-based capital requirements13. These instruments should be
decomposed into their individual legs. Only transaction legs representing a
bank’s exposures to the counterparty within the scope of the large
exposures framework should be considered14 for calculating a bank’s
total exposure to that counterparty.
7.18 In the case of credit
derivatives that represent sold protection, the exposure will be to the
referenced name, and it will be the amount due in case the respective
referenced name triggers the instrument, minus the absolute value of the
credit protection15. For credit-linked notes
(CLNs)16, the protection seller bank
will be required to consider its positions both in the bond of the note
issuer and in the underlying referenced by the note.
7.19 The measures of exposure
values of options (primarily meant for credit and equity options, where permitted)
under this framework differ from the exposure value used for risk-based
capital requirements. The exposure value of option under this framework
will be based on the change(s) in option prices that would result from a
default of the respective underlying instrument. The exposure value for a
simple long call option would therefore be its market value and for a short
put option would be equal to the strike price of the option minus its
market value. In the case of short call or long put options, a default of
the underlying would lead to a profit (i.e., a negative exposure) instead
of a loss, resulting in an exposure of the option’s market value in the
former case and equal the strike price of the option minus its market value
in the latter case. The resulting positions in all cases should be
aggregated with those from other exposures. After aggregation, negative net
exposures shall be treated as zero.
7.20 Exposure values of banks’
investments in transactions (i.e., index positions, securitisations, hedge
funds or investment funds) must be calculated applying the same rules as
for similar instruments in the banking book (see paragraphs under 8.3 to
7.VII Offsetting long and short
positions in the trading book
7.21 Offsetting between long and
short positions in the same issue: Banks
may offset long and short positions in the same issue (two issues are
defined as the same if the issuer, coupon, currency and maturity are
identical). Consequently, banks may consider a net position in a specific
issue for the purpose of calculating a bank’s exposure to a particular
7.22 Offsetting between long and
short positions in different issues: Positions
in different issues from the same counterparty may be offset only when the
short position is junior to the long position, or if the positions are of
the same seniority.
7.23 Similarly, for positions
hedged by credit derivatives, the hedge may be recognised provided the
underlying of the hedge and the position hedged fulfil the provision of
paragraph 7.22 above (the short position is junior or of equivalent
security to the long position).
7.24 In order to determine the
relative seniority of positions, securities may be allocated into broad
buckets of degrees of seniority (for example, “Equity”, “Subordinated Debt”
and “Senior Debt”).
7.25 The banks that find it
excessively burdensome to allocate securities to different buckets based on
relative seniority, should not recognise offsetting of long and short
positions in different issues relating to the same counterparty in
7.26 Offsetting short positions
in the trading book against long positions in the banking book: Netting across the banking and trading books is
7.27 Net short positions after
offsetting: When the result of the
offsetting is a net short position with a single counterparty, this net
exposure need not be considered as an exposure for the purpose of LEF.
8. Treatment of specific
8.1 This section covers
exposures for which a specific treatment is deemed necessary.
8.2 The interbank exposures,
except intra-day interbank exposures, will be subject to the large exposure
limit of 25% of a bank’s Tier 1 capital (also refer to paragraph 10.III).
In stressed circumstances, RBI may accept a breach of an interbank limit ex
post, in order to help ensure stability in the interbank market.
Undertakings (CIUs), securitisation vehicles and other structures -
adoption of “Look Through Approach” (LTA)
8.3 There are cases when a
structure lies between the bank and its exposures, that is, the bank
invests in structures through an entity which itself has exposures to
assets underlying the structures (hereafter referred to as the “underlying
assets”). In such cases, where the total amount of a bank’s such exposures
to a structure does not exceed 0.25 per cent of its eligible capital base,
it may assign the total exposure amount to the structure itself, defined as
a distinct counterparty. Otherwise, it should assign this total exposure
amount to the unknown client. The LE limit will apply on the aggregate of
all such unknown exposures as if they related to a single counterparty (the
8.4 In cases where a bank uses
Look Through Approach (LTA) as described in Appendix
1, it may, choose to assign such exposure amount, i.e., the amount
invested in a particular structure, to specific counterparties of the
underlying assets following the LTA. Such structures include funds,
securitisations and other structures with underlying assets.
the total amount of its exposure does not exceed 0.25 percent of its
eligible capital base, the bank must assign the total exposure amount of
its investment to the structure;
it must assign this total exposure amount to a single counterparty. The
bank must aggregate all such exposures where it cannot apply LTE as if they
related to one single counterparty, to which the LE limit would apply.
9. Identification of additional
9.1 While taking exposures to
structures, banks should identify such third parties which may constitute
an additional risk factor and which are inherent in the structure itself
rather than in the underlying assets. Such a third party could be a risk
factor for more than one structure that a bank invests in. Examples of
roles played by third parties include originator, fund manager, liquidity
provider and credit protection provider. RBI as a part of its pillar 2
supervisory review and evaluation process will look into this aspect and if
required specify a specific course of action which may either include
reduction in exposure or raising of additional capital.
9.2 It is conceivable that a
bank may consider multiple third parties to be potential drivers of additional
risk. In this case, the bank must assign the exposure resulting from the
investment in the relevant structures to each of the third parties.
10. Exposures to and among
certain specific counterparties
10.I Exposures to Central
10.1 Banks’ exposures to QCCPs17 related to clearing
activities will be exempted from the LE framework. However, these exposures
will be subject to the regulatory reporting requirements as defined in
10.2 The definition of QCCP for
the purpose of this Framework is the same as that used for risk-based
capital requirement purposes. A QCCP is an entity that is licensed to
operate as a CCP (including a license granted by way of confirming an
exemption), and is permitted by the appropriate regulator/overseer to
operate as such with respect to the products offered. This is subject to
the provision that the CCP is based and prudentially supervised in a
jurisdiction where the relevant regulator/overseer has established, and
publicly indicated that it applies to the CCP on an ongoing basis, domestic
rules and regulations that are consistent with the CPSS-IOSCO Principles
for Financial Market Infrastructures.
10.3 In the case of non-QCCPs,
banks must measure their exposure as a sum of both the clearing exposures
described in paragraph 10.5 and the non-clearing exposures described in
paragraph 10.7, and the same will be subject to the general LE limit of 25
percent of the eligible capital base.
10.4 The concept of connected
counterparties described in paragraph 6 does not apply in the context of
exposures to CCPs that are specifically related to clearing activities.
10.5 Calculation of exposures
related to clearing activities: Banks
must identify exposures to a CCP related to clearing activities and sum
together these exposures. Exposures related to clearing activities are
listed in the table below together with the exposure value to be used:
The exposure value of trade
exposures must be calculated using the exposure measures prescribed in
other parts of this framework for the respective type of exposures.
Segregated initial margin
The exposure value is 018.
Non-segregated initial margin
The exposure value is the
nominal amount of initial margin posted.
Pre-funded default fund
Nominal amount of the funded
Unfunded default fund
The exposure value is 0
10.6 Regarding exposures subject
to clearing services (the bank acting as a clearing member or being a
client of a clearing member), the bank must determine the counterparty to
which exposures must be assigned by applying the provisions of the
risk-based capital requirements.
10.7 Other exposures: Other types of exposures that are not directly
related to clearing services provided by the CCP, such as equity stake19, funding facilities, credit
facilities, guarantees etc., must be measured according to the rules set
out in this framework, as for any other type of counterparty. These
exposures will be added together and be subjected to the LE limit.
10. II. Exposures to NBFCs
10.8 Exposure Ceilings proposed
under LE Framework
(i) Exposures to NBFCs: Banks’
exposures to a single NBFC will be restricted to 15 percent of their
eligible capital base. However, based on the risk perception, more
stringent exposure limits in respect of certain categories of NBFCs may be
(ii) Banks’ exposures to a group
of connected NBFCs or groups of connected counterparties having NBFCs in
the group will be restricted to 25 percent of their Tier I Capital.
10.9 The above exposure limits
are subject to all other instructions in relation to banks’ exposures to
10.III Large exposures rules for
global systemically important banks (G-SIBs) and domestic systemically
important banks (D-SIBs)
10.10 The LE limit applied to a
G-SIB’s exposure to another G-SIB is set at 15 percent of the eligible
capital base. The limit applies to G-SIBs as identified by the Basel
Committee and published annually by the FSB and have presence in India
whether in branch format or in a subsidiary format. When a bank becomes a
G-SIB, it must apply the 15 percent exposure limit to another G-SIB within
12 months from the date of becoming G-SIB, which is the same time frame
within which a bank that has become a G-SIB would need to satisfy its
higher loss absorbency capital requirement.
10.11 The LE limit of a
non-G-SIB bank in India to a G-SIB (including branch) and a non-bank G-SIFI
will be 20 percent of the eligible capital base.
10.12 The Reserve Bank has
issued the Framework for dealing with Domestic Systemically Important Banks
(D-SIBs) on July 22, 2014, and discloses names of the banks classified as
D-SIBs on an annual basis. There is no specific exposure limit applicable
to D-SIBs and they will continue to be governed by interbank exposure
limits under the LEF.
11. Implementation date and
All aspects of the LE Framework
must be implemented in full by March 31, 2019 and the extant exposure norms
applicable to single/group of connected counterparties will no longer be
applicable from that date21. Banks must gradually adjust
their exposures so as to comply with the LE limit with respect to their
eligible capital base by that date. Accordingly, prior to this date, banks
should avoid taking any additional exposure/reduce exposure in cases where
their exposure is at or above the exposure limit prescribed under this
12. The Reserve Bank will review
the entire large exposure framework within two years from the issue of this
guidelines on the large exposures framework.
1 This requires that
banks shall apply LE framework at the consolidated group level, after
consolidating the assets and liabilities of its subsidiaries / joint
ventures / associates (including overseas operations through bank’s
branches) etc., except those engaged in insurance and any non-financial
2 Banks shall apply LE
framework at the standalone level also (including overseas operations
through branches), which should measure the exposures to a counterparty
based on its standalone capital strength and risk profile
3 The exemptions
currently available to exposures not listed herein will cease to exist
under the LE Framework.
exposures will continue to be governed by the Guidelines on Management of
Intra-Group Transactions and Exposures’ contained in the Master Circular –
Exposure Norms / Master Direction - Prudential Norms on Banks’ Exposures.
5 Net of specific
provisions and value adjustments.
6 Refer to Master
Direction – Basel III Capital Regulation, as amended from time to time
7 Unfunded credit
protection refers collectively to guarantees and credit derivatives the
treatment of which is described in paragraphs 5.17 & 7.5 respectively
(The standardised approach – credit risk mitigation) of the Master Circular –
Basel III Capital Regulations dated July 1, 2015
8 Refer to the Master
Circular on Basel III Capital Regulations
9 Paragraph 7.4 of the
Master Circular on Basel III Capital Regulation.
10 Paragraph 7.3.4 of
Master Circular on Basel III Capital Regulations.
11 As provided in terms
of our RBI Master Circular – Exposure norms / Master Direction on
Prudential Norms for Classification, Valuation and Operation of Investment
Portfolio by Banks.
12 CDS is the only
credit derivative allowed under our extant guidelines and banks do not have
direct exposures to the equity derivatives. It is clarified that
restrictions on dealing with certain type of instruments, assets and
derivatives etc., which are currently in place shall continue to be
applicable even if the guidelines contained in this circular contains
references to the same.
13 Refer Master
Circular/Direction - Basel III Capital Regulations
14 At present, banks
are not permitted to have exposures to equity derivatives, however, for the
sake illustration, a future on stock X, for example, is decomposed into a
long position in stock X and a short position in a risk-free interest rate
exposure in the respective funding currency, or a typical interest rate
swap is represented by a long position in a fixed and a short position in a
floating interest rate exposure or vice versa.
15 In the case that the
market value of the credit derivative is positive from the perspective of
the protection seller, such a positive market value would also have to be
added to the exposure of the protection seller to the protection buyer
(counterparty credit risk; see paragraph 7.3 of this circular). Such a
situation could typically occur if the present value of already agreed but
not yet paid periodic premiums exceeds the absolute market value of the
16 CLNs are not
permitted to be issued by banks in India under the extant RBI guidelines.
17 For designation of
CCPs as QCCPs please refer to circular DBOD.No.BP.BC.82/21.06.217/2013-14
dated January 7, 2014 on Banks' Exposure
to Central Counterparties (CCPs) - Interim Arrangements,
18 When the initial
margin (IM) posted is bankruptcy-remote from the CCP – in the sense that it
is segregated from the CCP’s own accounts, eg when the IM is held by a
third-party custodian – this amount cannot be lost by the bank if the CCP
defaults; therefore, the IM posted by the bank can be exempted from the
large exposure limit.
19 If equity stakes in
a CCP are deducted from the capital on which the large exposure limit is
based, these must not be included as exposure to the CCP.
20 As contained in
Master Circular – Exposure Norms / Chapter ---- of Master Direction -
Prudential Norms on Banks’ Exposures
21 The LE Framework is
applicable to a bank’s counterparties and does not address other types of
concentration risks such as sectoral exposures. As such, the extant
instructions contained in the RBI Master Circular – Exposure norms / Master
Direction - Prudential Norms on Banks’ Exposures, will continue to be
applicable, except to the extent superseded by the provisions of this