Trading Book Rules have been tightened as the Reserve Bank of India revised market-risk capital requirements for banks, including stricter investment reclassification norms and allowing certain structural foreign exchange positions to be excluded from net open position calculations. The new framework will take effect from April 1, 2027 and aligns India’s market-risk regulations with the revised Basel III framework.
Key Highlights
- RBI tightens trading book rules from April 2027, restricting reclassification aimed at reducing banks’ capital requirements.
- Banks can exclude certain structural FX positions from NOP calculations, subject to RBI-prescribed conditions and limits.
RBI Tightens Banking and Trading Book Classification
Under the revised framework, banks cannot reclassify instruments between their trading and banking book to reduce regulatory capital requirements. If a reclassification results in a lower capital requirement, the difference will have to be maintained as an additional capital surcharge.
The RBI has also clarified that banks cannot count internal risk transfers from the trading book to the banking book while calculating regulatory capital. However, banking-book risks can be hedged through external hedges or permitted internal risk transfers.
For market-risk capital calculations, banks will need to account for interest-rate and equity risks on trading-book instruments, while foreign-exchange risks, including those related to gold and precious metals, will apply across both trading and banking books.
Structural Foreign Exchange Positions Can Be Excluded
The new RBI framework permits banks to exclude certain structural or non-dealing foreign currency positions from their net open position (NOP).
Eligible positions include capital investments and accumulated or unremitted surplus in overseas subsidiaries, joint ventures and associates, overseas branches, IFSC Banking Units and Offshore Banking Units in Special Economic Zones.
However, the exclusion will be subject to specific conditions. It will be limited to the amount required to neutralise the sensitivity of a bank's capital ratio to exchange-rate movements.
Banks must maintain the exclusion for at least six months, apply the treatment consistently and follow their risk-management policies for such positions.
RBI Revises Capital Treatment for Debt Funds and ETFs
The RBI has also changed the market-risk capital treatment for debt mutual funds and exchange-traded funds.
Funds with at least 90% of their assets under management in debt instruments, along with specified disclosure and valuation requirements, will be assessed based on their underlying debt securities.
Funds that do not meet these conditions, including those with less than 90% of their AUM invested in debt instruments, will be treated similarly to equity for market-risk capital calculations.
Certain other investments, including contributions to the Corporate Debt Market Development Fund (CDMDF), will attract a 9% capital charge.
12% Capital Charge for Certain Non-Equity Instruments
The RBI has prescribed a 12% specific-risk capital charge for certain non-equity capital instruments issued by banks and other financial entities, irrespective of their external credit ratings, subject to specified exclusions.
The framework also revises specific-risk capital rules for interest-rate exposures and credit derivative hedges, including positions hedged through total return swaps.
Also Read: RBI Introduces ECL Norms for Banks, Strengthens Risk Framework
New RBI Market-Risk Framework Effective April 2027
The broader framework covers interest-rate, equity and foreign-exchange risks and requires banks to meet the prescribed market-risk capital requirements at the end of each business day.
The RBI said the revised directions are intended to align India's market-risk capital framework with Basel III while keeping the regulations simple and providing banks flexibility in implementation.
Transition scalars have already been in effect since April 1, 2024, supporting the move toward the new framework.
