The RBI will bring out a consultative paper outlining its approach to implementation of margin requirements for over-the-counter derivatives before the month-end.

This follows a global framework on margin requirements for non-centrally cleared derivatives as agreed by the Basel Committee on Banking Supervision (BCBS) and the International Organisation of Securities Commissions (IOSCO) unveiled in March 2015.

The global framework is the outcome of deliberations among the G-20 nations (which includes India) to improve transparency in the OTC derivatives markets, further regulation of OTC derivatives and market participants, besides limiting excessive and opaque risk-taking through OTC derivatives and to mitigate the systemic risk posed by OTC derivatives transactions, markets, and practices.

The G-20’s reform programme to reduce systemic risk (risk of collapse of a financial system due to contagion spread as a result of default of certain entities within the system) in 2009, consisted of four elements — exchange/electronic trading of all standardised OTC derivatives, clearing of trades through a central counterparty, reporting of all OTC derivatives contracts to trade repositories, and higher capital requirements for non-centrally cleared derivatives contracts.

Margin requirements on non-centrally cleared derivatives were added to this list in 2011 and a working group was formed by BCBS and IOSCO.

Margin is brought in to absorb losses in case a counterparty to a transaction (buyer or seller) defaults. Capital is required as a shock absorber to the financial system and to help surviving entities meet losses incurred.

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