RBI Introduces Draft Guidelines for OTC Derivative Contracts Novation

The Reserve Bank of India (RBI) has taken a significant step towards reforming the over-the-counter (OTC) derivatives market by releasing draft directions aimed at regulating the novation of OTC derivative contracts. This move is designed to streamline and rationalize the regulatory framework governing these transactions.

Understanding Novation in OTC Derivatives

Novation, as outlined in the draft guidelines titled Reserve Bank of India (Novation of OTC Derivative Contracts) Directions, 2025, involves replacing an existing market maker in an OTC derivative contract with a third-party transferee. The RBI emphasizes that such transactions must be executed at prevailing market rates and with the prior consent of the remaining counterparty.

Standard Agreements and Market Practices

To ensure clarity and uniformity, the RBI has mandated the development of standard agreements for novation. These agreements will be prepared by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Foreign Exchange Dealers’ Association of India (FEDAI), in collaboration with market participants and incorporating international best practices.

Revising the Regulatory Framework

The current regulatory framework, established by an RBI circular on December 9, 2013, is under review. The RBI's latest initiative reflects changes in the regulatory landscape since 2013, incorporating market feedback and aiming to simplify regulatory requirements for OTC derivatives novation.