The Central Bank of India – Reserve Bank of India (RBI) amended the its Directions i.e. Reserve Bank of India (Margin for Derivative Contracts) Directions, 2024, to facilitate margin management for trading in permitted derivatives. In the context of derivative trading, margin money is the specific percentage of the value of outstanding position as cash in a trading account by the investor with the aim of minimising the risk exposure for the stock exchanges one is trading on.
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Amendment by RBI
As per the RBI Circular dated 8th May 2024, it outlines new rules that immediately apply to certain banks. These rules allow these banks to handle margin money for derivative contracts involving non-residents both within and outside India. They can also manage margin transactions for their overseas branches and units in International Financial Services Centres (IFSCs).
Margin posted and collected shall be in following form:
- Indian currency;
- Freely convertible foreign currency;
- Indian Central Government and State Governments issued debt securities;
- Indian residents issued Rupee bonds:
○ Listed on a recognized Indian stock exchange; and
○ Rated AAA by SEBI-registered agencies, with the lowest rating considered if multiple agencies rate differently. - Certificate of Deposits; and
- Commercial Papers with a minimum A1 rating from SEBI-registered agencies, considering the lowest rating if multiple agencies rate differently.
If banks choose to follow foreign margin requirements for certain transactions, they can handle margin money and interest payments accordingly, either by themselves or through their overseas branches or head offices.
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Expansion of ADs’ Role in Margin Management for International Derivative Contracts
Two notifications were issued by the Central Bank. The recent update involves allowing certain authorized dealers (ADs) to handle margin money both within and outside India for derivative contracts involving a person residing outside India. This includes
- The ability to collect and post margin
- Paying and receiving interest on it
- Derivative contracts between two ADs, as long as one of them is a branch of a foreign bank.
Additionally, similar arrangements are extended to derivative contracts involving overseas branches and International Financial Services Centre Banking Units.
The second update allows authorized dealers (ADs) in India to let people living outside India open and manage accounts in Indian Rupees or foreign currency. These accounts are meant for posting and collecting margin money in India for approved derivative contracts.
Impact and Expert Opinion
Anindya Ghosh, an expert from INDUSLAW, highlighted that this adjustment enables non-residents to accrue interest on funds held in these accounts, thereby facilitating their management of margin obligations for derivative contracts within India. These revisions are anticipated to streamline and enhance the efficiency of derivative trading for foreign investors, potentially augmenting their involvement and bolstering liquidity in India’s financial markets.
Read RBI Full Circular: Margin for Derivative Contracts
About Author
Manasi Gawali, is an Economics graduate from St. Xavier’s College, Mumbai. She is passionate about economics and finance. She enjoys research, writing poems, music, and travel.
