An Important Step for India’s Margin Rules

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

When Group-of-20 (G-20) leaders agreed an outline of the post-crisis regulatory framework in Pittsburgh in 2009, they were very clear that global standards should be implemented consistently in a way that ensures a level playing field and avoids fragmentation of markets. That has not always been the case in practice, but the Reserve Bank of India (RBI) recently finalized initial margin (IM) requirements for non-cleared derivatives that adhere closely to the spirit of that G-20 edict, enhancing the efficiency and competitiveness of the local market.

The IM framework, announced earlier this month, will allow Indian branches of foreign banks to rely on substituted compliance when entering into non-cleared derivatives transactions with another domestic entity in scope of the rules. This is a positive step forward, as it avoids a scenario where a foreign bank branch would have had to simultaneously comply with multiple sets of rules when transacting with an Indian counterparty.

ISDA had engaged extensively with the RBI on this issue and it was also highlighted in a recent whitepaper on India’s over-the-counter derivatives market. While the initial draft of the IM rules, published for consultation in 2022, allowed substituted compliance for transactions between foreign bank branches and other offshore counterparties, this wasn’t extended to transactions between two local branches of foreign banks or between a local branch of a foreign bank and an Indian entity. This would have needlessly led to those branches being subject to different and potentially overlapping requirements whenever they transact with a domestic firm, resulting in significant operational complexity.

The fact that trades between foreign branches and local institutions can now be subject to a single set of rules will significantly improve efficiency and competition in the Indian market, so we commend the RBI for making this important change.

The final rules provide an implementation period of six months, meaning in-scope entities will be required to begin posting IM on November 8, 2024. ISDA is working with members to get the necessary documentation, collateral segregation and margin calculation models in place to meet that deadline. We will also review local custodian arrangements to ensure consistency with other jurisdictions.

The posting of IM has become a vital risk mitigant – according to ISDA’s most recent margin survey, $462 billion of initial margin was collected by 32 leading derivatives market participants for their non-cleared derivatives exposures at the end of 2023. To work effectively, though, it’s crucial that IM rules are implemented on a consistent basis across the globe. The RBI has taken an important step towards achieving that.

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