RBI/2010-11/223
DBOD.No.BP.BC.48 / 21.06.001/2010-11
October 1, 2010
All Scheduled Commercial Banks
(Excluding Local Area Banks and Regional Rural Banks)
Dear Sir,
Prudential Norms for Off-Balance Sheet Exposures of Banks – Bilateral
netting of counterparty credit exposures
As you are aware, in terms of our extant instructions issued vide our Master
Circular – ‘Prudential Guidelines on Capital Adequacy and Market Discipline -
New Capital Adequacy’, DBOD,No,.BP.BC.15 / 21.06.001 / 2010 - 11 dated July 1,
2010, banks have been advised to adopt ‘Current Exposure Method’ for estimating
their credit equivalent amount for interest rate and foreign exchange derivative
transactions and gold. The credit equivalent amount is used for the purposes of
capital adequacy and exposure norms.
2. On receipt of requests from banks, the issue of allowing bilateral netting
of counterparty credit exposures, in such derivative contracts, has been
examined within the existing legal framework. Since the legal position regarding
bilateral netting is not unambiguously clear, it has been decided that bilateral
netting of mark-to-market (MTM) values arising on account of such derivative
contracts cannot be permitted. Accordingly, banks should count their gross
positive MTM value of such contracts for the purposes of capital adequacy as
well as for exposure norms.
Yours faithfully,
(B Mahapatra)
Chief General Manager-in-Charge