New Delhi: The RBI on Friday tweaked guidelines to scale back the danger confronted by banks of their publicity to capital market within the case of concern of Irrevocable Cost Commitments (IPCs). The RBI issued a round stating that “solely these custodian banks shall be permitted to concern IPCs, who’ve a clause within the settlement with shoppers giving the banks an inalienable proper over the securities to be obtained as payout in any settlement.”
Nevertheless, this clause won’t be insisted upon if the transactions are pre-funded i.e., both clear INR funds can be found within the buyer’s account or, within the case of FX offers, the financial institution’s nostro account has been credited earlier than the issuance of the IPC.
The utmost intraday threat to the custodian banks issuing IPCs can be reckoned as Capital Market Publicity (CME) at 30 per cent of the settlement quantity. That is primarily based on the belief of 20 per cent downward worth motion of the equities on T+1, with an extra margin of 10 per cent for additional downward motion of worth, the RBI stated.
In case the margin is paid in money, the publicity will stand diminished by the quantity of margin paid. In case the margin is paid by the use of permitted securities to Mutual Funds / International Portfolio Buyers, the publicity will stand diminished by the quantity of margin after adjusting for a ‘haircut’ as prescribed by the Alternate on the permitted securities accepted as margin, the RBI added.
Beneath T+1 settlement cycle, the publicity shall usually be just for intraday. Nevertheless, in case any publicity stays excellent on the finish of T+1 Indian Customary Time, capital must be maintained on the excellent capital market publicity when it comes to the Grasp Round – Basel III Capital Rules dated April 1, 2024, as amended sometimes.
The underlying exposures of banks to their counterparties, emanating from the intraday CME, shall be topic to limits prescribed underneath Massive Publicity Framework dated June 3, 2019, as amended sometimes. The RBI stated that these directions shall come into power with fast impact.
The RBI additionally defined that the danger mitigation measures prescribed in its earlier round have been primarily based on T+2 rolling settlement for equities (T being the Commerce day). The Inventory Exchanges have since launched T+1 rolling settlement, and accordingly, the extant pointers on issuance of IPCs by banks have been reviewed. Henceforth, all IPCs issued by custodian banks underneath the T+1 settlement cycle will adjust to the brand new directions.
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