RBI says MTM value on OTC derivative novation must be exchanged upfront
Mumbai, Sep 22, 2026
The central bank says subsequent novation after an OTC derivative contract has been accepted for settlement by a central counterparty will follow the revised directions
The Reserve Bank of India (RBI) on Tuesday clarified that the mark-to-market (MTM) value of an over-the-counter (OTC) derivative contract will have to be exchanged upfront between the transferor and transferee when the contract is novated, while any subsequent novation after a contract has been accepted for settlement by a central counterparty (CCP) will be subject to the central bank’s revised directions.
The clarifications were part of the RBI’s response to feedback received on its draft directions on novation of OTC derivative contracts.
The central bank said the directions will apply to novation undertaken after the date of their issuance, including novation of OTC derivative contracts that are already outstanding on that date as well as contracts entered into subsequently.
The RBI also clarified that novation undertaken by a CCP for the purpose of settlement of an OTC derivative contract will not be covered by the directions. However, any subsequent novation of a contract accepted for settlement by the CCP will have to be undertaken in accordance with the directions.
The definition of the “remaining party” has also been expanded to include a market maker or a CCP. Where the CCP is the remaining party, novation will have to be carried out according to the procedure specified by the CCP.
The RBI did not accept a proposal to allow novation where both the transferor and transferee are users, including where a user transfers an OTC derivative contract to its central treasury or group entity. It said one of the parties to an OTC derivative transaction has to be a market maker or a CCP authorised by the RBI.
For novations arising from mergers, demergers or amalgamations, the RBI said the existing framework under its December 9, 2013, circular on “Novation of OTC Derivative Contracts” will continue to apply.
The central bank also linked the definition of a market maker to the respective governing directions for the OTC derivative contract, instead of retaining a common definition under the draft directions.
[The Business Standard]
