The Reserve Bank of India (RBI) has revised the guidelines for banks’ exposure to capital markets, particularly concerning Irrevocable Payment Commitments (IPCs). These changes respond to the shift from T+2 to T+1 rolling settlement cycles on stock exchanges.
Key Changes in IPC Guidelines
Custodian Banks’ Rights:
- Custodian banks can issue IPCs only if they have an agreement clause with clients granting them an inalienable right over securities received during settlements.
- This clause is waived if transactions are pre-funded, meaning either clear INR funds are in the customer’s account or the bank’s nostro account is credited before issuing the IPC.
Intraday Risk:
- The maximum intraday risk for custodian banks issuing IPCs is capped at 30% of the settlement amount.
- This accounts for a possible 20% downward price movement of equities on T+1, with an additional 10% margin for further declines.
Margin Payments:
- If margin is paid in cash, the IPC exposure is reduced by the amount of margin paid.
- If margin is paid using permitted securities to mutual funds or foreign portfolio investors, the exposure is reduced by the margin amount after adjusting for haircuts prescribed by the exchange on these securities.
Capital Maintenance:
- Under T+1 settlement cycles, exposure is typically intraday.
- If exposure remains outstanding at the end of T+1 Indian Standard Time, capital must be maintained on the outstanding capital market exposure, in line with the Basel III Capital Regulations.
Large Exposure Framework:
- The underlying exposures of banks to counterparties from intraday capital market exposure are subject to limits prescribed under the Large Exposure Framework.
Applicability:
- The previous guidelines from December 27, 2011, concerning IPCs in T+2 settlements, remain valid. The revised guidelines came into effect immediately.
Summary
These revisions ensure that custodian banks issuing IPCs under T+1 settlements have clear rights over securities, manage intraday risks effectively, and comply with capital maintenance requirements. The RBI’s updated framework addresses the evolving landscape of stock market settlements and aligns with regulatory standards.
Access the full RBI circular here
