The Reserve Bank of India finalised two capital frameworks for commercial banks on 7 October. Its standardised approach for counterparty credit risk will be mandatory for banks with an international presence or outstanding derivatives of at least ₹25,000 crore on a consolidated, group-wide basis at the reporting date. Banks below those tests may choose between the existing Current Exposure Method and the new standardised approach. Both frameworks take effect on 1 April 2027.
The accompanying credit valuation adjustment framework requires capital against losses caused by changes in a derivatives counterparty’s creditworthiness. Banks with non-centrally cleared derivatives of ₹10 lakh crore or less may elect a simpler alternative treatment, while larger books must use the prescribed basic approach. Under the alternative, the CVA capital charge equals the bank’s counterparty credit-risk capital requirement and eligible hedges cannot reduce that charge.
DERIVATIVES EXPOSURES RECEIVE A COMMON MEASUREMENT STANDARD
The counterparty-risk directions cover over-the-counter and exchange-traded derivatives, securities-financing transactions and long-settlement transactions in the banking book. They clarify the treatment of multiple margin agreements and netting sets, clearing-member activity on recognised Indian exchanges, deferred option premiums and the effective notional amount of options. The RBI also added disclosure templates to the final framework.
The central bank issued draft counterparty-risk directions in June and draft CVA directions in August before incorporating stakeholder feedback. It retained the April 2027 implementation date for both frameworks. The final rules therefore give affected banks less than six months to complete calculations, documentation, systems changes and reporting preparations.
CVA OPTIONS VARY WITH THE SIZE OF DERIVATIVE BOOKS
Banks using the main CVA framework may apply either a full or reduced basic approach. The full version is intended for institutions that actively hedge CVA risk and permits recognition of specified credit-spread hedges, including eligible single-name and index credit-default swaps. The reduced version simplifies the calculation for banks that do not actively hedge that risk.
The thresholds divide the sector by international activity and the scale of derivative exposure, while applying a common implementation date. Banks will need to determine which route applies at each reporting date and maintain evidence for their chosen calculations. The next formal milestone is 1 April 2027, when both the counterparty-risk and CVA directions become operative.