Balancing the Risk: RBI’s Big Move on CCR in Derivatives

In a move that could reshape India’s derivatives landscape, The Reserve Bank of India (RBI) has rolled out draft guidelines to tighten the management of Counterparty Credit Risk (CCR). Announced in August 2025, the proposals aren’t just about new rules, they signal a decisive push to make India’s financial system more shock-proof and globally competitive. The proposed norms focus on banks acting as clearing members in equity and commodity derivatives markets.

What is Counterparty Credit Risk?

Counterparty Credit Risk (CCR) refers to the risk that the counterparty to a derivative contract may default before the final settlement, leaving the non-defaulting party exposed to replacement costs. In India’s derivatives market, CCR is particularly critical due to the increasing use of over-the-counter (OTC) contracts and exchange-traded derivatives. CCR impacts capital adequacy, pricing, and systemic stability. The RBI’s renewed focus on CCR stems from the need to align risk sensitivity with market depth and volatility.

Insights Into RBI’s Proposed Changes in CCR

Here are the key insights into the recent draft by the RBI:

Differentiation by Contract

The RBI’s draft circular introduces an explicit classification of contracts into five categories: interest rate, exchange rate (including gold), equities, precious metals (excluding gold), and other commodities. Tenors are segmented into <1 year, 1–5 years, and >5 years. This stratification ensures capital charges are proportionate to market volatility and exposure duration, enhancing risk sensitivity. For instance, a short-term interest rate swap will attract a minimal add-on, while a long-term equity derivative will attract a higher add-on. (RBI)

RBI’s Granular Add-ons

The RBI has proposed moving from static to granular add-on factors for calculating Potential Future Exposure (PFE) under the Current Exposure Method (CEM). These factors vary by asset class and tenor. For interest rate contracts, add-ons range from 0.25% (<1 year) to 1.50% (>5 years). Exchange rate and gold contracts have add-ons from 1% to 7.50%, equities range from 6% to 10%, and other commodities from 10% to 15%. (Economic Times)

Alignment with Basel Committee Standards

The RBI’s revised CCR framework is designed to align with the Basel Committee on Banking Supervision (BCBS) standards, particularly the 2014 revisions to the CEM and the 2017 guidelines on CCR management (BIS). The add-on factors mirror Basel’s prescribed ranges, and the treatment of clearing members is consistent with global norms (RBI).

For instance, the RBI now mandates capital charges for banks acting as clearing members in The Securities and Exchange Board of India (SEBI)-recognised exchanges, similar to the European Market Infrastructure Regulation (EMIR) and US Dodd-Frank Act provisions. This alignment ensures international comparability and facilitates cross-border regulatory recognition.

Impact of Proposed Changes

Here is how the proposed changes will affect banks and market participants:

Capital Requirements for Banks
The revised add-on factors significantly increase capital requirements for banks, especially for longer-tenor and volatile instruments. For example, a 7-year commodity derivative will now attract a 15% add-on, up from the earlier flat 8%. This translates into higher Credit Conversion Factors (CCFs), thereby inflating Risk-Weighted Assets (RWAs) (RBI). Banks with large proprietary books in equity and commodity derivatives may see capital charges rise by 20% to 35%.

Compliance Burden on Clearing Members
Banks acting as clearing members face new compliance obligations under the revised CCR norms. They must now compute PFE separately for each contract type and tenor, requiring upgrades to risk engines and reporting systems. Additionally, clearing members must maintain capital buffers for client positions, even if netted at the exchange level. This increases operational complexity and may necessitate real-time margining and collateral optimisation.

Reduction in Derivatives Market Participation
The higher capital charges and compliance costs could lead to reduced participation in certain derivative segments, particularly long-tenor commodity and equity contracts. Market data from NSE and MCX indicate that open interest in >5-year commodity derivatives is already down as of July 2025. Smaller banks and proprietary desks may exit high-cost segments, leading to concentration risk.

The RBI acknowledges this possibility but argues that the trade-off is justified for systemic safety. The impact will be more pronounced in illiquid contracts with low turnover and wide bid-ask spreads.

Transparency Gains
Despite the short-term contraction in market activity, the RBI expects long-term gains in systemic stability and transparency. The granular PFE framework improves risk attribution and reduces hidden leverage. Stress tests conducted by the RBI in Q1 FY25–26 show that banks with diversified derivative books are better capitalised and less exposed to counterparty defaults (RBI). The revised norms also mandate enhanced disclosures under Pillar 3, including (RBI) contract-wise CCR exposure and collateral coverage.

Comparison with Basel III and Global Practices
India’s revised CCR norms now closely resemble Basel III’s CEM guidelines and practices in jurisdictions like the EU, UK and Singapore. For example, the EU’s CRR II framework prescribes add-ons of 0.5% to 1.5% for interest rate contracts and up to 15% for commodities, similar to RBI’s proposed structure. However, India retains the CEM approach, while many advanced economies have transitioned to the Standardised Approach for CCR (SA-CCR). The RBI has indicated that SA-CCR may be adopted in a phased manner after FY26–27, subject to market readiness. (Taxguru)

Conclusion

The RBI has invited public comments on the draft circular until September 10, 2025. Initial feedback from banks and clearing corporations highlights concerns over implementation timelines and cost burdens. Industry bodies like FIMMDA and FEDAI have requested a phased rollout and transitional relief for legacy contracts. Some market participants, however, have welcomed the move for its alignment with global standards and improved risk sensitivity. The RBI has committed to reviewing stakeholder inputs before finalising the circular, with a likely effective date of April 1, 2026.

Sources:

RBI
Economic Times
BIS
Taxguru