RBI extends deadline for mandatory FX clearing to Jan 1

Last Updated: Wed, Sep 26, 2012 08:44 hrs

RBI has asked the local currency market association to defer the deadline for mandating that lenders route their forward trades through a domestic clearing house by three months, market participants told Reuters.

The new Jan. 1 deadline gives players time to iron out concerns that some foreign banks have over terms such as potential default liability exposures and capital charges in settling at the clearing house.

Traders at local banks said the proposal is likely to be accepted by the Foreign Exchange Dealers' Association of India (FEDAI) at a meeting on Wednesday, and will then be communicated to banks.

Banks will need to sign the agreement with the Clearing Corp of India Ltd (CCIL), the clearing and settlement platform approved by Reserve Bank of India (RBI), by Dec. 31, a source at a bank said.

Once that is done, the CCIL is expected to begin guaranteeing dollar-rupee forward trades from 2013.

While most domestic banks are already members of the central counter-party platform, the majority of foreign banks have yet to sign on the dotted line due to concerns about clauses, including their potential exposure to unlimited liability should one or more participants default.

"RBI has yesterday (Tuesday) communicated to FEDAI that the deadline has been pushed by 90 days based on representation by foreign banks," said Indirani Rao, the chief forex officer at CCIL.

The development is part of global regulations that aim to ensure over-the-counter derivatives such as interest rate swaps are put through central clearing houses and, in some cases, traded electronically.

India, along with South Korea and China, want to force commonly-traded domestic currency-denominated derivatives, such as swaps and forwards, to be cleared onshore at their domestic clearing houses rather than allowing them to go through a larger offshore clearer such as LCH-Clearnet or CME.

But conflicting rules, charges and other operational hurdles could force major Western banks to scale back or even withdraw from some of Asia's derivative markets.

The CCIL is working on changing some rules to adhere to the global regulatory standards which will enable foreign banks to finally join, Rao added.

"The RBI is also working on whether exemption can be granted to CCIL on single borrower limit and on settlement of deals in case of a default," Rao said.

As of now 55 banks are members of CCIL, and the clearing house guarantees about 25 percent of volumes in rupee forwards.

"The extensions of the deadline will give parties time for a mutually beneficially agreement for all," said a second official at a lender.

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