Mumbai: The Reserve Bank of India (RBI) implemented adjustments on Friday aimed at mitigating the risk encountered by banks in their involvement with the capital market concerning the issuance of Irrevocable Payment Commitments (IPCs).
In a circular issued by the RBI, it was stated that “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 payout in any settlement.”
However, this clause will not be mandated if the transactions are pre-funded, meaning either 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 the issuance of the IPC.
The maximum intraday risk to the custodian banks issuing IPCs would be calculated as Capital Market Exposure (CME) at 30 percent of the settlement amount.
This calculation is based on the assumption of a 20 percent downward price movement of the equities on T+1, with an additional margin of 10 percent for further downward movement of the price, as stated by the RBI.
If the margin is paid in cash, the exposure will be reduced by the amount of margin paid. If the margin is paid by way of permitted securities to Mutual Funds / Foreign Portfolio Investors, the exposure will be reduced by the margin amount after adjusting for a ‘haircut’ as prescribed by the Exchange on the permitted securities accepted as margin, the RBI added.
Under the T+1 settlement cycle, the exposure shall typically be limited to intraday. However, if 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 accordance with the Master Circular – Basel III Capital Regulations dated April 1, 2024, as amended from time to time.
The underlying exposures of banks to their counterparties, arising from the intraday CME, will be subject to limits prescribed under the Large Exposure Framework dated June 3, 2019, as amended from time to time.
The RBI stipulated that these instructions shall be effective immediately.
Additionally, the RBI clarified that the risk mitigation measures outlined in its earlier circular were based on T+2 rolling settlement for equities (T being the Trade day). Since then, the Stock Exchanges have introduced T+1 rolling settlement, and accordingly, the existing guidelines on the issuance of IPCs by banks have been revisited.
Henceforth, all IPCs issued by custodian banks under the T+1 settlement cycle will adhere to the new instructions.
