The Reserve Bank of India has proposed a new rulebook on how big banks must measure and hold capital against the risk that their trading partners in complex financial contracts may default, in a move that aligns India with updated global Basel III standards while aiming to keep the framework simpler for smaller derivative players.

The Reserve Bank of India has proposed a new rulebook on how big banks must measure and hold capital against the risk that their trading partners in complex financial contracts may default, in a move that aligns India with updated global Basel III standards while aiming to keep the framework simpler for smaller derivative players.

The Reserve Bank of India has proposed a new rulebook on how big banks must measure and hold capital against the risk that their trading partners in complex financial contracts may default, in a move that aligns India with updated global Basel III standards while aiming to keep the framework simpler for smaller derivative players.

The Reserve Bank of India on Friday released draft “Credit Valuation Adjustment (CVA) Framework” directions for commercial banks and invited public comments until August 28, 2026.

Credit Valuation Adjustment or CVA is essentially a safety cushion that banks build into the price of derivatives (contracts whose value depends on interest rates, currencies, commodities or stock indices) to reflect the chance that the other side of the deal might not pay up.

CVA risk is the possibility that this cushion itself will move up or down as markets and the perceived creditworthiness of counterparties change, creating gains or losses for banks.

For ordinary customers, this is not something that is cause for concern, for these draft regulations do not affect savings accounts, home loans or fixed deposits. The framework is targeted at the part of banks’ business where they trade or hedge using derivatives with companies, financial institutions and sometimes large investors.

RBI wants banks to hold dedicated capital against CVA risk so that unexpected losses on these positions do not threaten their overall stability.

Under the draft, all commercial banks (excluding small finance banks, payments banks and local area banks) must calculate a CVA capital charge for their non‑centrally cleared derivatives, i.e., those not run through a regulated clearing house.

Most will use a “Basic Approach” (BA‑CVA), available in a full or reduced version, that applies risk weights depending on who the counterparty is (for example, a government, bank or company) and its credit quality.

Banks with a relatively small derivative book, i.e., up to ₹10 lakh crore of non‑centrally cleared derivatives in notional terms, may choose a simpler route. Instead of running the full BA‑CVA calculation, they can set their CVA capital equal to 100 per cent of the capital they already hold for counterparty credit risk on those trades, but then they are not allowed to claim any benefit from hedges specifically put in place to offset CVA risk.

The draft goes further to clarify when and how banks can recognise CVA hedges, increases the granularity of risk weights by sector and rating, and, in the full BA‑CVA, separates broad market‑wide CVA risk from counterparty‑specific risk, making the regime more “risk‑sensitive.” If finalised in its present form, the Directions are set to take effect from April 1, 2027.

As per the circular: “The comments on the draft Directions are invited from Regulated Entities, market participants, and other interested parties till August 28, 2026. The comments/feedback may be submitted through the link under the ‘Connect 2 Regulate’ Section available on the Reserve Bank’s website or may alternatively be forwarded to: The Chief General Manager, Market Risk Group, Department of Regulation, Central Office Reserve Bank of India, 12th Floor, Shahid Bhagat Singh Marg, Fort, Mumbai – 400 001 or by email (mrgdor@rbi.org.in) with the subject line ‘Feedback on Credit Valuation Adjustment (CVA) Framework’.”

TAGS