RBI has finalised the regulatory framework for novation of over-the-counter (OTC) derivative contracts following public consultation on the 2025 draft directions.
RBI Finalises Novation Framework for OTC Derivatives
The Reserve Bank of India has issued final directions on the novation of over-the-counter (OTC) derivative contracts, incorporating feedback received on the draft framework released on July 9, 2025. The finalised instructions provide clarity on the legal and operational aspects of transferring OTC derivative positions between counterparties, ensuring market integrity and risk mitigation.
Novation, the process of replacing one party in a contract with a third party, is critical in derivatives markets for risk management and portfolio restructuring. The directions define eligible market participants, permissible types of contracts, documentation standards, and regulatory reporting requirements. The accompanying statement summarising major feedback indicates RBI’s responsive rulemaking approach.
These directions will impact banks, NBFCs, and corporates engaging in hedging or speculative derivative transactions. Legal practitioners must assess implications for master agreements (e.g., ISDA), netting enforceability under Indian law, and interplay with insolvency regimes. The framework strengthens India’s financial market infrastructure and aligns with international practices under the ISDA Master Agreement regime.