The Reserve Bank of India on Monday issued final directions on minimum capital requirements for market risk for banks, clearly demarcating the banking book and trading book of a bank.
These directions, effective April 2027, aim to align market risk guidelines with the revised Basel III framework, while ensuring simplicity of regulations, and providing flexibility and ease of adoption, the RBI said in a release.
To ensure a smooth transition, intermediate (transition) scalars have been in effect since April 1, 2024, it said.
When calculating market risk capital requirements, banks must factor in interest rate and equity risks for trading-book instruments, as well as foreign-exchange risks (including gold and precious metals) across both trading and banking books, the RBI said. The trading book, for capital adequacy, will include all instruments that are classified as ‘held for trading’ (HFT). Banks must also compute and maintain market risk capital charges at both the consolidated and standalone levels.
Banks cannot count internal risk transfers from the trading book to the banking book when calculating regulatory capital. However, the RBI permits hedging banking-book risks either via external hedges or internal risk transfers.
Other key changes include revising specific risk tables for interest rate risk to align with the Basel Committee on Banking Supervision guidelines.
The RBI also revised the capital treatment for debt mutual funds and ETFs to ensure computation on underlying risk drivers while maintaining adequate guardrails. It revised specific risk capital rules for credit derivative hedges to include positions hedged via total return swaps.