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RBI Lowers Margin Funding Limits to 30% from 50%

Following the reduction in trade settlement time from T+2 to T+1 and T+0 for select equities by stock exchanges, the Reserve Bank of India (RBI) has decreased the maximum risk for custodian banks issuing irrevocable payment commitments (IPCs) from 50% to 30%. This decision is based on the assumption of potential downward price movements of equities purchased by foreign institutional investors/mutual funds over two successive days from the trade date.

Review of Guidelines

The RBI’s decision is a result of the review of risk mitigation measures originally prescribed in a December 2011 circular, which were based on T+2 rolling settlement for equities. With the introduction of T+1 rolling settlement by stock exchanges, the guidelines on IPC issuance have been reassessed.

Intraday Risk Assessment

Under the revised guidelines, the maximum intraday risk for banks issuing IPCs is determined as capital market exposure at 30% of the settlement amount, considering a 20% downward price movement of equities on T+1. An additional margin of 10% is added to account for further potential downward price movement.

Impact on Margin Money

If margin money is paid in cash, the exposure will be reduced by the amount of margin paid, aligning with the revised margin funding limits set by the RBI.

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