What changed
The circular confirms that the existing IPC risk mitigation measures, originally outlined in earlier circulars from September 2010, October 2010, and October 2011, will continue to be in force until further review. No new requirements or modifications have been introduced; the current framework is simply extended.
What it means for you
Banks issuing IPCs must continue to adhere to the existing conditions, including the requirement for custodian banks to have an inalienable right over securities (unless pre-funded), and the 50% risk reckoning based on assumed price movements. Capital must be maintained on the CME exposure with a 125% risk weight, and IPCs are treated as financial guarantees with a 100% CCF. This provides regulatory stability but no relief from existing compliance burdens.
What you must do
- Ensure custodian bank agreements include an inalienable right over securities for IPC issuance, unless transactions are pre-funded with clear INR funds or nostro credit.
- Continue to compute Capital Market Exposure (CME) at 50% of settlement amount on T+1 end-of-day, adjusting for any margin payments received in cash or securities.
- Maintain capital on CME exposure with a 125% risk weight, treating IPCs as financial guarantees with a 100% Credit Conversion Factor.
- Monitor early pay-in deadlines strictly by Indian Time end-of-day; funds received after that do not reduce CME.
Who it affects
All Scheduled Commercial Banks (excluding RRBs) acting as custodian banks, Mutual Funds and Foreign Institutional Investors (FIIs) using IPC facilities, Stock exchanges receiving IPCs from custodian banks
What is the key condition for issuing an IPC without an inalienable right clause?
If the transaction is pre-funded, meaning clear INR funds are in the customer's account or, for FX deals, the bank's nostro account is credited before IPC issuance, the inalienable right clause is not required.
How is the Capital Market Exposure (CME) calculated on T+1?
CME is 50% of the settlement amount at end-of-day on T+1, assuming a 20% price drop on each of T+1 and T+2 plus a 10% buffer. If margin is paid in cash, CME is reduced by the margin amount; if paid in securities, CME is reduced by margin minus the exchange-prescribed haircut.
Does this circular introduce any new requirements?
No, it only extends the existing risk mitigation measures from previous circulars until further review. All previous conditions remain unchanged.