Brief Overview:
The proposed standalone directions on novation of OTC derivative contracts, previously proposed in 2025, have been finalised. Instead of issuing standalone directions, the RBI has incorporated the framework into its existing directions governing foreign exchange, rupee interest rate, government securities and credit derivatives.
Technical Details:
Key Highlights
1) Scope: Novations undertaken solely for settlement through a CCP are excluded. However, any subsequent novation of a CCP-accepted contract must comply with the framework. Novation arising from mergers, demergers or amalgamations remain governed by the RBI’s December 2013 circular.
2)Â Upfront MTM exchange: The mark-to-market amount must be exchanged upfront between the transferor and transferee. This is a key addition to the draft framework.
3)Â Tripartite documentation: The transferor, transferee and remaining party must enter into a tripartite agreement. The original contract is extinguished and replaced by a new contract on identical terms, except for the counterparty change.
4)Â Standard documentation: Participants may use a standard agreement devised or recommended by FEDAI or a CCP, or an appropriate standard master agreement for novation transactions.
5) Trade Repository reporting: Novation details must be reported to CCIL’s Trade Repository.
The final norms apply to novation undertaken on or after 22nd September 2026. Existing contracts will therefore be covered if novated on or after this date.
Takeaways:
Market participants should review their novation documentation and processes for prior consent, upfront MTM exchange, tripartite documentation and Trade Repository reporting. They should also assess whether a proposed novation falls under the final framework, the CCP settlement carve-out or the separate RBI’s December 2013 framework for mergers, demergers and amalgamations.
For further details, please see:
Novation of OTC Derivative Contracts
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