What changed
RBI replaced the earlier transition period (extended to 30 Sep 2010) with a permanent risk mitigation framework for IPCs. Custodian banks now need explicit contractual rights over securities and must calculate capital market exposure (CME) at 50% of settlement amount, with specific rules for margin payments. The arrangement is valid until 31 Oct 2011, after which it will be reviewed.
What it means for you
Banks issuing IPCs face tighter risk controls, reducing their exposure to equity price swings and defaults by FIIs/mutual funds. The 50% risk assumption and margin treatment increase capital requirements, as IPCs are treated as financial guarantees under the Master Circular on Exposure Norms. This may raise operational costs for custodian banks but protects them from adverse market movements.
What you must do
- Review and amend client agreements to include an inalienable right over securities to be received as payout.
- Calculate CME at 50% of settlement amount for IPCs issued, adjusting for any margin paid in cash or securities.
- Ensure capital is maintained against IPCs as financial guarantees per para 2.3 of the Master Circular on Exposure Norms (July 1, 2010).
- Monitor margin payments on T+1 to reduce or eliminate exposure, applying haircuts for securities tendered as margin.
Who it affects
Custodian banks issuing IPCs to FIIs and mutual funds, All scheduled commercial banks (excluding RRBs) with capital market exposure
What is the maximum risk a custodian bank can take on an IPC?
The maximum risk is capped at 50% of the settlement amount, based on an assumed 20% price drop on each of T+1 and T+2, plus an additional 10% margin for further downward movement.
How does early pay-in affect IPC exposure?
If there is early pay-in on T+1, the exposure is eliminated entirely. If margin is paid in cash, CME is 50% minus the margin paid; if paid in securities, CME is 50% minus margin plus haircut prescribed by the exchange.
Are IPCs treated as financial guarantees for capital purposes?
Yes, IPCs are treated as financial guarantees, and capital must be maintained against them as per para 2.3 of the Master Circular on Exposure Norms dated July 1, 2010.