RBI Proposes Overhaul Of Novation Norms For OTC Derivatives

In order to streamline over-the-counter derivative contracts, the Reserve Bank of India has issued draft norms for novation of OTC derivative deals, it said in a press release.

The proposed framework provides a clear regulatory mechanism for novation of OTC derivative contracts, where one of the counterparties in a contract is replaced with a new entity, with consent from the remaining party.

Transactions must be undertaken at prevailing market rates, the central bank said.

The RBI has sought to replace existing norms laid down in 2013 with the fresh draft guidelines and has invited public comments until Au. 1.

This draft is part of its efforts to rationalise regulatory requirements in light of evolving global practices and feedback from market participants. It also reflects the broader reforms seen in the OTC derivatives space since the 2013 circular.

A key change is the formalisation of tripartite agreements between the transferor, transferee, and the remaining party. Under this model, the original contract is extinguished and a new one with identical terms is created, ensuring transparency and risk continuity.

Additionally, mark-to-market value of the contract must be exchanged between the outgoing and incoming parties. Standard documentation for such contracts will be prepared by Fixed Income Money Market and Derivatives Association of India and Foreign Exchange Dealer's Association Of India, aligning with global best practices.

All novation details must be reported to the Trade Repository of the Clearing Corp., the central bank said.

The guidelines do not apply to novations conducted by central counterparties or those arising out of mergers, demergers, or court-approved reorganisations.

For banks and financial institutions that are active in India’s derivatives market, the draft brings long-awaited clarity on the process and legal framework for transferring risks in OTC deals. It also introduces a more uniform novation procedure, reducing ambiguity and operational risk.