The Reserve Bank of India (RBI) has introduced the Reserve Bank of India (Margin for Derivative Contracts) Directions, 2024, under Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999. These Directions come into immediate effect, superseding the previous A. P. (DIR Series) Circular No. 10 dated February 15, 2021.
The updated regulations focus on posting and collecting margin for derivative contracts between Indian residents and non-residents. They apply to Authorised Dealer Category-I (AD Cat-I) banks and Authorised Dealer Category-III Standalone Primary Dealers (AD Cat-III SPDs).
According to the Directions, a “Permitted derivative contract” refers to those allowed under the Foreign Exchange Management (Margin for Derivative Contracts) Regulations, 2020, as amended. Other key definitions include “Certificate of Deposit” and “Commercial Paper,” with meanings as specified in the respective RBI Master Directions.
Authorised Dealers are now permitted to post and collect margin both within and outside India for permitted derivative contracts with non-residents. They can also receive and pay interest on such margins. This provision extends to derivative transactions of their overseas branches and IFSC Banking Units. Additionally, AD Cat-I banks can post and collect margin on behalf of their customers for permitted derivative contracts with non-residents.
The regulations specify the forms in which margin can be posted and collected in India. These include Indian currency, freely convertible foreign currency, debt securities issued by the Indian Central and State Governments, rupee bonds listed on recognized stock exchanges with a minimum AAA credit rating, Certificates of Deposit, and Commercial Papers with a minimum A1 credit rating. For margins posted and collected outside India, acceptable forms include freely convertible foreign currency and debt securities issued by foreign sovereigns with a minimum AA- credit rating.
The new Directions also accommodate compliance with foreign jurisdiction margin requirements for Non-Centrally Cleared Derivative (NCCD) transactions involving non-residents or transactions between Authorised Dealers, one of which may be a foreign bank branch. In such cases, margins may be posted and collected outside India in forms permitted by the respective foreign laws, either by the Authorised Dealer or its overseas branches or head office as part of a global margin arrangement.
To facilitate these processes, AD Cat-I banks must maintain separate accounts for non-residents to manage the posting and collection of cash margin in India and related transactions.
These Directions aim to streamline the margin requirements for derivative contracts, ensuring better alignment with international standards and enhancing the operational flexibility of Authorised Dealers in India. By addressing market feedback and incorporating global best practices, the RBI aims to foster a more robust and resilient financial market infrastructure in India.
