Introduction
On October 7, 2026, the Reserve Bank of India issued the Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Amendment Directions, 2026 (RBI/2026-27/284), rewriting the methodology commercial banks must use to calculate minimum capital for counterparty credit risk. The amendment replaces Chapters II and III of the Forthcoming Instructions Directions dated November 28, 2025, and, for the largest banks, retires the Current Exposure Method in favour of the Standardised Approach for Counterparty Credit Risk (SA-CCR), with the stated aim of aligning Indian prudential rules more closely with international standards.
Legal Basis, Applicability and Effective Date
The Directions are issued under Section 35A of the Banking Regulation Act, 1949, which empowers the RBI to issue binding directions to banking companies where it considers this necessary in the public interest, so a breach carries the consequences that attach to non-compliance with that Act.
The amendment substitutes paragraphs 7 to 21 of the 2025 Directions with new paragraphs 6A to 21, renames the existing Annex as Annex 1, and inserts Annex 2, containing worked illustrations of the exposure computation, and Annex 3, setting out the disclosure templates. The amended text operates alongside the Commercial Banks – Prudential Norms on Capital Adequacy Directions, 2025, to which it cross-refers for collateral haircuts, securities financing transactions and the valuation of credit valuation adjustment.
The framework takes effect on April 1, 2027, and is mandatory for commercial banks that have an international presence or hold derivatives with an outstanding book value of ₹25,000 crore or more, measured on a consolidated, group-wide basis as on the reporting date. Other commercial banks may choose between the Current Exposure Method and SA-CCR. For banks within the mandatory category, SA-CCR must replace the Current Exposure Method for every regulatory purpose and be applied consistently.
The new paragraph 6A introduces twenty-six definitions, the most significant being counterparty credit risk itself, which the RBI describes as the risk that a counterparty defaults before the final settlement of a transaction’s cash flows. Unlike a loan, where only the lender faces loss, this risk is bilateral, because the market value of a derivative can move in favour of either party over its life. A netting set is defined as a group of transactions with one counterparty covered by a legally enforceable bilateral netting arrangement, and a netting set is treated as margined only where the counterparty must post variation margin to the bank.
Scope and Methodology for Counterparty Credit Risk
Paragraph 6B requires a counterparty credit risk charge on over-the-counter derivatives, exchange-traded derivatives, securities financing transactions and long-settlement transactions in the banking book, as well as on OTC derivatives and repo-style transactions in the trading book, separately from the market risk charge and using standardised credit risk weights. For sold options and credit default swaps in which the bank is the protection seller and which fall outside netting and margin agreements, exposure may be capped at the unpaid premium, and credit default swap protection bought to hedge a banking book exposure may be excluded where the hedged exposure’s capital requirement has already been substituted under paragraph 129 of the Capital Adequacy Directions.
A bank may defer the premium on options sold to users only under a policy approved by its Board or Risk Management Committee, where the user’s ability to pay has been assessed, the deferment does not extend beyond the contract’s maturity, and the premium is received uniformly at least once a quarter. This facility is unavailable to intermediary banks that have no option book of their own, the suitability and appropriateness requirements of the Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 continue to apply, and any deferred premium must be included in replacement cost.
Under paragraph 6C, OTC derivatives, exchange-traded derivatives and long-settlement transactions are measured under SA-CCR in both books, securities financing transactions remain governed by paragraphs 157 to 165 of the Capital Adequacy Directions, and centrally cleared exposures follow paragraphs 15 to 20. Exposure to a counterparty is the sum of its netting set exposures, which for OTC derivative counterparties may be reduced by any credit valuation adjustment loss already recognised as an incurred write-down, although this reduction does not lower the separate CVA risk capital requirement. Risk-weighted assets are obtained by multiplying the resulting exposure by the counterparty’s risk weight.
How SA-CCR Calculates Counterparty Credit Exposure
SA-CCR builds exposure from replacement cost and potential future exposure, calculated separately for each margined and unmargined netting set, and the exposure of a margined netting set is capped at what the same netting set would produce if it were unmargined. Replacement cost represents the loss a bank would suffer if its counterparty defaulted and its trades were closed out immediately.
For unmargined netting sets, it is the greater of zero and the market value of the derivatives less the haircut value of net collateral held, including initial margin received, with haircuts under paragraph 163 of the Capital Adequacy Directions scaled to the maturity of the longest transaction, capped at 250 days. For margined netting sets, it is the greatest of the market value less net collateral, the sum of the margin threshold and minimum transfer amount less the net independent collateral amount, and zero, so that it captures the largest exposure that can build up without triggering a margin call.
Potential future exposure measures how much the value of the trades could change between the last exchange of collateral and their replacement after default. It is an aggregate add-on multiplied by a multiplier, floored at 5 per cent, which falls below one where the bank is over-collateralised or the trades are out of the money.
The add-on is the simple sum of add-ons across interest rates, foreign exchange (including gold), credit, equity and commodities, with no diversification benefit between asset classes, and offsetting is permitted only within hedging sets, formed for each currency in interest rates, each currency pair in foreign exchange, a single set each for credit and equity, and four sets for energy, metals, agricultural and other commodities.
Each trade’s effective notional, which combines its size, maturity and direction, is multiplied by a supervisory factor fixed at 0.50 per cent for interest rate derivatives, 4 per cent for foreign exchange, between 0.38 and 6 per cent for single-name credit, 32 per cent for single-name equity and 18 to 40 per cent for commodities, and banks may not substitute their own volatility or beta estimates. Since Indian banks cannot deal in equity or commodity derivatives on their own account, those add-ons apply only where a bank acts as a clearing member of an exchange in those segments.
The margin period of risk for margined trades may not fall below ten business days for non-centrally cleared derivatives under daily margining, rising to twenty business days for netting sets that exceeded 5,000 transactions in the previous quarter or that contain illiquid collateral or hard-to-replace OTC derivatives. A bank with more than two prolonged margin disputes on a netting set over two quarters must double the floor for the next two quarters. Where netting sets carry multiple margin agreements, or where collateral is held outside a netting set, the Directions prescribe how replacement cost is calculated and how collateral is allocated.
The netting benefit underpinning these calculations depends entirely on legal enforceability under paragraph 10(3), and the RBI may withdraw it if not satisfied that an arrangement is enforceable. A bank must have a contract creating a single legal obligation for the net sum on default, bankruptcy or liquidation, with no walk-away clause, and must hold reasoned legal opinions confirming enforceability under the law of the counterparty’s incorporation, any foreign branch involved, the transactions and the netting agreement. Cross-product netting between derivatives and securities financing transactions is not recognised.
Capital Treatment of Exposures to Central Counterparties
Chapter III covers CCP exposures from derivatives, securities financing and long-settlement transactions, excluding cash settlement in equities, fixed income and spot foreign exchange, which remains under paragraph 86 of the Capital Adequacy Directions. A qualifying central counterparty is a CCP licensed for the products it clears and supervised in a jurisdiction whose rules are applied consistently with the CPMI-IOSCO Principles for Financial Market Infrastructures.
Risk-weighted assets for a QCCP equal the trade exposure charge plus 12.5 times the default fund capital requirement, but never more than the amount for a non-qualifying CCP, where trade exposures attract the standardised risk weight and default fund contributions attract 1,250 per cent. A bank may continue QCCP treatment for up to three months after a CCP loses that status. A clearing member bank applies a 2 per cent risk weight to its trade exposures to a QCCP, using a margin period of risk of ten business days for OTC derivatives, but must capitalise exposures to its own clients as bilateral trades, with a margin period of risk of at least five business days.
A bank clearing as a client receives the 2 per cent risk weight only if its collateral is protected against the default of the clearing member and its other clients and its positions are highly likely to be ported on default, rising to 4 per cent where protection against their joint default is absent and to bilateral treatment where the conditions are not met. Collateral held by a bankruptcy-remote custodian carries no counterparty credit risk charge, while collateral held at a CCP without that protection attracts 2 or 4 per cent.
Default fund contributions are capitalised using a formula based on the QCCP’s hypothetical capital, applying a minimum risk weight of 20 per cent that the RBI may increase, with the charge floored at the equivalent of a 2 per cent risk weight. Banks must also consider under their Internal Capital Adequacy Assessment Process whether additional capital is warranted against CCP exposures, stress test that capital where they act as clearing members, and report all CCP exposures to senior management and the appropriate Board committee at least quarterly.
Pillar 3 Disclosure Requirements
Paragraph 21 requires banks to disclose all exposures subject to a counterparty credit risk charge, including CCP exposures, as part of their Pillar 3 obligations, through a qualitative statement (Table CCRA) and five templates covering exposures by approach, by portfolio and risk weight, collateral composition, credit derivatives and exposures to central counterparties (CCR1 to CCR5), with formats and frequency set out in Annex 3.
Conclusion
The RBI Amendment Directions 2026 substantively change how India’s largest commercial banks measure the capital consequences of their derivatives, clearing and collateral activity. By replacing the Current Exposure Method with SA-CCR, the RBI has linked capital more closely to collateralisation, margining terms, the legal enforceability of netting and the soundness of central counterparties, while leaving smaller banks free to adopt the new standard voluntarily ahead of the April 1, 2027 effective date.
RBI’s prudential requirements also extend to capital adequacy disclosures for small finance banks under the RBI SFB Capital Adequacy: Pillar 3 Framework 2026.
