The Reserve Bank of India has issued draft guidelines on minimum capital requirements for market risk as a part of the convergence of banking regulations with Basel III standards.

The central bank has sought feedback on the norms by April 15, and has proposed that the final norms will come into effect from April 1, 2024.

The draft guidelines propose separate classification of the securities that are included in banks’ trading book, which is subject to market risk capital requirements, and those included in the banking book--which are subject to credit risk capital requirements.

Banks will need to have clearly defined policies, procedures and documented practices for determining which instruments to include in or to exclude from the trading book for the purposes of calculating their regulatory capital, the central said.

Defining market risk as the risk of losses in on and off-balance-sheet positions arising from movements in market prices, RBI said that the risks subject to market risk capital requirements include interest rate and equity risk for trading book instruments and foreign exchange risk (including gold and precious metals) for trading and banking book instruments.

“Banks shall only include a financial instrument or instruments on FX in the trading book when there is no legal impediment against selling or fully hedging it. Banks shall fair value daily any trading book instrument,” the central bank said whilst specifying which instruments need to be considered a part of the trading and banking book. 

As per the draft norms, banks will be required to classify any instrument held for at least one year as a trading book instrument under the following categories--short-term resale, profiting from short-term price movements, locking in arbitrage profits, or hedging risks that arise from the three previous categories.

If a bank needs to deviate from the presumptive list for an instrument, it will need to seek the central bank’s prior approval before doing so, it said, adding that banks will need to document any deviations on an on-going basis.

Further, shifting of instruments between the trading and banking books should be rare, will be allowed only in extraordinary circumstances, and will require the approval of RBI and the bank’s board. Further, any capital benefit as a result of this shifting will not be allowed, RBI added.

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