The RBI has finalized the regulatory framework for novation of over-the-counter (OTC) derivative contracts, based on stakeholder feedback, to enhance market stability and reduce counterparty risk.
RBI Finalizes OTC Derivative Novation Framework
The Reserve Bank of India has finalised the Reserve Bank of India (Novation of OTC Derivative Contracts) Directions, 2026, following the release of a draft framework in July 2025. The final directions, issued on September 22, 2026, under reference FMRD.DIRD.No.04/14.03.066/2026-27, establish a formal mechanism for the novation — the legal substitution of one party in a contract with another — of OTC derivative contracts.
The framework aims to improve market resilience by facilitating orderly transfer of positions during financial stress or insolvency, reducing systemic counterparty risk. It outlines eligibility criteria for novation participants, timing, documentation requirements, and regulatory reporting. The RBI noted that major stakeholder concerns regarding operational complexity and legal enforceability have been addressed in the final text, with clarifications on netting enforceability and cross-border recognition.
This development is significant for banks, financial institutions, and corporate treasuries engaged in derivatives trading. Legal teams should update ISDA agreements and internal risk protocols to align with the novation process. The framework also strengthens India’s alignment with global standards under the Financial Stability Board (FSB) and Basel Committee guidelines.
Citations
- Reserve Bank of India (Novation of OTC Derivative Contracts) Directions, 2026, FMRD.DIRD.No.04/14.03.066/2026-27