The Reserve Bank today came out with a discussion paper on margin requirements for non-centrally cleared derivatives or OTC instruments with a view to curtail possible excessive risks taken by market players.
“Derivatives are an integral risk management tool for business entities and financial institutions. However, derivative markets can also lead to excessive and opaque risk taking, which may result in systemic risks, especially so in the context of the over-the-counter (OTC) derivative markets,” the central bank said in a notification this evening.
In the first bi-monthly policy announcement for the year, the central bank had announced that it would issue a discussion paper on the subject after the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions finalised a framework on the same.
These international bodies have suggested reforms in the market such as trading of standardised OTC derivatives on exchanges or electronic platforms, their clearing through central counterparties and higher capital requirements on non-centrally cleared derivatives.
Stating that the RBI has taken a slew of steps in this regard, the discussion paper said exchange of margins by the counterparties to a non-centrally cleared OTC derivative is not widely prevalent in the country, making it all the more important to caution the market against blind risk-taking.