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RBI/2005-06/ 267
DBOD. No. BP.BC. 53 / 21.04.157 / 2005-06
December 28, 2005
All Scheduled Commercial Banks
Dear Sir
Rupee Interest rate derivatives
(including rupee – foreign currency derivatives) – Setting of limits for
non-option derivative contracts
Please refer to letter DBOD
No. BP.BC. 91/ 21.04.157/ 2004-05 dated May 20, 2005 regarding interest
rate derivatives in terms of which while market participants were advised to
henceforth use only domestic rupee benchmarks for interest rate derivatives,
they had been given a transition period of 6 months for using MIFOR as a benchmark
subject to review. Subsequently, it was clarified that eligible market makers
could continue to use MIFOR swaps for market making subject to appropriate limits
as approved by RBI.
2. On a review and in consultation
with market participants it has now been decided as under :
i. The gross PV 01 of all non-option
rupee derivative contracts (including rupee – foreign currency contracts) should
be within 0.25 per cent of the net worth of the bank as on the last balance
sheet date. The limit would, however, exclude the PV 01 of derivatives which
are hedges for balance sheet exposures provided these hedges meet the criteria
of hedge effectiveness as laid down in our circular IDMC.MSRD.4801
/06.01.03/2002-03 dated June 3, 2003. In this connection, attention of the
banks is invited to RBI letter No.DBS.CO.PPD.47/ 11.01.021/ 2005-06 dated August
19, 2005 regarding computation of net worth.
ii. The capital charge for
market risk for the non-option derivative contracts would be 3 times the
PV 01 calculated as at (i) above or the capital charge for market risk
calculated as per the methodology given in the Master Circular on capital
adequacy DBOD No.BP.BC.13/21.01.002 /2005-06 dated 4th July
2005, whichever is higher.
iii. Banks should not exceed
their AGL limits.
3. It is clarified that
market participants can use MIFOR swaps in respect of transactions having
underlying permissible forex exposure.
4. Banks, currently having exposure
above the specified PV 01 limit for non-option derivative portfolio should report
to RBI their current position and the time frame within which they expect to
bring down the exposure within the specified limit. The period for bringing
down the position should not be more than six months from the date of this circular.
Please acknowledge receipt.
Yours faithfully
Sd/-
Prashant Saran
Chief General Manager-in-Charge
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