The Reserve Bank of India (RBI) on Wednesday has issued draft to regulate the process of novation in over-the-counter (OTC) derivative contracts Directions 2025 under Section 45W of the RBI Act 1934.
Novation refers to the substitution of one counterparty (transferor) in a derivative contract with another (transferee), subject to the consent of the continuing counterparty (remaining party).
The draft aims to ensure legal clarity, risk mitigation, and standardised practices in such transactions across foreign exchange, interest rate, and credit derivatives.
Under the proposed framework, novation must be carried out through a tripartite agreement, executed at prevailing market rates, ensuring full transfer of rights and obligations. Contracts must comply with applicable RBI master directions, and the original deal is extinguished upon novation. Any associated documents must be handed over to the new counterparty.
The directions also call upon industry associations like FIMMDA and FEDAI to create standardised novation templates, aligned with international best practices. Furthermore, all novated contracts must be reported by the involved market-makers to the Clearing Corporation of India’s (CCIL) trade repository.
These directions replace earlier RBI circulars, marking a shift toward a more formalised and harmonised framework for novation within India’s OTC derivatives ecosystem.
RBI has invited comments on the draft Directions from banks, market participants and other interested parties by August 01, 2025.