The Reserve Bank of India (RBI) recently issued guidelines revising the rules concerning Banks’ Exposure to Capital Market – specifically focusing on the issuance of Irrevocable Payment Commitments (IPCs) by custodian banks.
The previous guidelines, as outlined in circular DBOD.Dir.BC.68/13.03.00/2011-12, were based on a T+2 rolling settlement for equities. However, with the introduction of T+1 rolling settlement by Stock Exchanges, the RBI has reviewed and updated the extant guidelines.
Under the new instructions, custodian banks issuing IPCs must have clauses in agreements with clients granting the banks an inalienable right over securities to be received as pay out in any settlement. Exceptions to this clause are made for pre-funded transactions, where clear INR funds are available in the customer’s account or, in the case of FX deals, the bank’s nostro account has been credited before IPC issuance.
Moreover, the guidelines outline risk mitigation measures. Custodian banks’ maximum intraday risk is limited to 30 percent of the settlement amount, considering a 20 percent downward price movement of equities on T+1, with an additional 10 percent margin for further downward movement. The exposure may be reduced by margin payments, either in cash or permitted securities, subject to prescribed haircuts.
Additionally, outstanding exposures at the end of T+1 must adhere to capital maintenance requirements as per Basel III Capital Regulations. Banks’ underlying exposures to counterparties, stemming from intraday Capital Market Exposure (CME), are subject to limits under the Large Exposure Framework.
While these instructions are effective immediately, the guidelines of circular DBOD.Dir.BC.68/13.03.00/2011-12 for T+2 settlement cycle remain valid.
******
Reserve Bank of India
RBI/2024-25/33
DOR.CRE.REC.22/21.03.054/2024-25
May 03, 2024
All Scheduled Commercial Banks
(excluding RRBs)
Madam/Dear Sir,
Banks’ Exposure to Capital Market – Issue of Irrevocable Payment Commitments (IPCs)
Please refer to circular DBOD.Dir.BC.68/13.03.00/2011-12 dated December 27, 2011 on “Banks’ Exposure to Capital Market – Issue of Irrevocable Payment Commitments (IPCs)” and mailbox clarification dated September 11, 2012 on “Applicability of Irrevocable Payment Commitments”.
2. The risk mitigation measures prescribed in the aforesaid circular were based on T+2 rolling settlement for equities (T being the Trade day). The Stock Exchanges have since introduced T+1 rolling settlement, and accordingly the extant guidelines on issuance of IPCs by banks have been reviewed. Henceforth, all IPCs issued by custodian banks under the T+1 settlement cycle shall comply with the following instructions:
i. Only those custodian banks will be permitted to issue IPCs, who have a clause in the Agreement with clients giving the banks an inalienable right over the securities to be received as pay out in any settlement. However, this clause will not be insisted upon if the transactions are pre-funded i.e., either clear INR funds are available in the customer’s account or, in case of FX deals, the bank’s nostro account has been credited before the issuance of the IPC.
ii. The maximum intraday risk to the custodian banks issuing IPCs would be reckoned as Capital Market Exposure (CME) at 30 percent of the settlement amount. This is based on the assumption of 20 percent downward price movement of the equities on T+1, with an additional margin of 10 percent for further downward movement of price.
iii. In case margin is paid in cash, the exposure will stand reduced by the amount of margin paid. In case margin is paid by way of permitted securities to Mutual Funds / Foreign Portfolio Investors, the exposure will stand reduced by the amount of margin after adjusting for haircut as prescribed by the Exchange on the permitted securities accepted as margin.
iv. Under T+1 settlement cycle, the exposure shall normally be for intraday. However, in case any exposure remains outstanding at the end of T+1 Indian Standard Time, capital will have to be maintained on the outstanding capital market exposure in terms of the Master Circular – Basel III Capital Regulations dated April 1, 2024, as amended from time to time.
v. The underlying exposures of banks to their counterparties, emanating from the intraday CME, will be subject to limits prescribed under Large Exposure Framework dated June 3, 2019, as amended from time to time.
3. The instructions contained in circular DBOD.Dir.BC.68/13.03.00/2011-12 dated December 27, 2011on ‘Banks’ Exposure to Capital Market – Issue of Irrevocable Payment Commitments (IPCs)’ shall continue to remain valid for T+2 settlement cycle.
4. These instructions shall come into force with immediate effect.
Yours faithfully,
(Vaibhav Chaturvedi)
Chief General Manager
