RBI Draft Circular on Novation of OTC Derivative Contracts, Read and Provide Feedback

The Reserve Bank of India has released Draft Reserve Bank of India (Novation of OTC Derivative Contracts) Directions, 2025. RBI has invited comments on the draft Directions from banks, market participants and other interested parties by August 01, 2025. In order to understand this, first let’s understand what are OTC derivative contracts.

What are OTC derivative contracts?

OTC (Over-the-Counter) derivative contracts are financial contracts like interest rate swaps, currency swaps, options, etc., that are traded directly between two parties, without going through an exchange. These are customizable but carry higher counterparty risk since there’s no central body guaranteeing the trade.

What is Novation? Novation is a legal process in which an existing contract between two parties is replaced with a new one, involving a third party. In the case of financial markets, novation usually refers to replacing a bilateral contract with a new contract where a central clearing counterparty (CCP) becomes the buyer to every seller and the seller to every buyer. This reduces the credit risk (default risk) between the original two parties.

To strengthen the Indian financial system and reduce counterparty risk, RBI introduced a framework for the novation of eligible OTC derivative contracts to a central counterparty, such as CCIL (Clearing Corporation of India Ltd.).

This is important as this leads to:

1. Risk Reduction: Helps reduce bilateral credit risk.
2. Systemic Stability: Prevents market collapse due to defaults.
3. Regulatory Compliance: Aligns with global standards like those from the Basel Committee on Banking Supervision (BCBS) and Financial Stability Board (FSB).

How to Provide Feedback?

You can download PDF from link given below and send suggestions/ comments via email or at address mentioned below.

Click here to download Draft Directions

Feedback on the draft Directions may be forwarded to:

The Chief General Manager
Reserve Bank of India
Financial Markets Regulation Department
9th Floor, Central Office Building
Shahid Bhagat Singh Marg, Fort
Mumbai – 400 001

Or by email with subject line “Feedback on Draft Reserve Bank of India (Novation of OTC Derivative Contracts) Directions, 2025”.

Novation of OTC derivative contracts

At present, the novation of OTC derivative contracts is governed by RBI circular dated December 09, 2013. The provisions of the circular have been reviewed in the light of changes in the overall regulatory framework governing OTC derivatives since 2013 and the market feedback received as well as with a view to rationalising the related regulatory requirements.

Click here to download more RBI Circulars