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RBI in its 'prudential norms for off-balance Sheet Exposures of Banks' notification said, banks may partially or fully terminate the contract before maturity, at their discretion, thereby reducing the notional exposure of the contract
Mumbai: The Reserve Bank of India (RBI) said banks will have the discretion to terminate a derivative contract in case a client decides to reduce its exposure in such instrument pre-maturely, reports PTI.
However, such transaction would not be treated as restructuring of the derivative contract provided all other parameters of the original contract remain unchanged, RBI said in a notification.
So far, any change in any of the parameters of a derivative contract was treated as restructuring and the mark-to-market (MTM) value of the contract on the date of restructuring was settled in cash.
"There may be situations where the clients of banks may like to reduce the notional exposure of the hedging derivative contract.
"In such cases, banks may partially or fully terminate the contract before maturity, at their discretion, thereby reducing the notional exposure of the contract," RBI said in 'prudential norms for off-balance Sheet Exposures of Banks' notification.
Off-balance sheet deals include currency and interest rate derivatives, securitised loans and guarantees.
The notification further said, there may be cases, where the derivative contract has been terminated, either partially or fully, MTM has been permitted to be repaid in instalments but the client subsequently decides to hedge the same underlying exposure again by entering into new contract with same or other bank.
In such cases, banks may offer derivative contracts to the client provided the client has fully re-paid the entire outstanding instalments corresponding to the derivative contract that was used to hedge the underlying exposure previously, it added.