RBI Grade BNABARD ESISEBI
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On July 10, 2025, the Reserve Bank of India (RBI) released draft guidelines proposing a structured mechanism for novation of over-the-counter (OTC) derivative contracts. This move aims to enhance transparency, fairness, and legal certainty in OTC derivatives markets.
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Context
What is Novation?
Novation is a legal process that replaces an existing contract with a new one by substituting one counterparty while maintaining identical contractual terms (except the party change).
- Parties Involved in Novation:
- Transferor: Original party who exits the contract.
- Transferee: New party entering the contract.
- Remaining Party: The party that remains unchanged and continues in the new contract.
Key Features of the RBI Draft Guidelines
- Consent Requirement
- Novation can occur only with the explicit consent of the remaining party.
- Tripartite Agreement
- A formal tripartite agreement among the transferor, transferee, and remaining party is necessary.
- Fair Valuation and Market Rates
- Novation must occur at prevailing market rates.
- The mark-to-market value must be exchanged between transferor and transferee to reflect financial fairness.
- Standardised Documentation
- RBI has asked FIMMDA (Fixed Income Money Market and Derivatives Association of India) and FEDAI (Foreign Exchange Dealers’ Association of India) to:
- Develop standard documentation based on international best practices.
- Alternatively, participants can use a standard master agreement.
- RBI has asked FIMMDA (Fixed Income Money Market and Derivatives Association of India) and FEDAI (Foreign Exchange Dealers’ Association of India) to:
- Regulatory Reporting
- All novated transactions must be reported to the Trade Repository of CCIL (Clearing Corporation of India Ltd) in compliance with existing norms.