RBI issues final directions for minimum capital requirement for market risk under Basel III

As per the latest business developments, The Reserve Bank of India (RBI) stated on September 21 that it has issued the final directions for the minimum capital requirement for market risk under Basel III for commercial banks.

The guidelines, which were first introduced back in April 2023, proposed the adoption of the Simplified Standardised Approach (SSA) for computing capital requirements for market risk under the revised Basel III framework.

Now, under the final directions of the framework, the RBI has clarified the boundary between the banking book and trading book for a commercial bank. It has stated that the trading book, for capital adequacy, will include all instruments that are classified as ‘Held for Trading’ (HFT).

The RBI stated that a bank should not classify any instrument under the trading book as part of the banking book to showcase softer capital requirements. In case the bank classifies such instruments, the lender is supposed to determine its total capital requirement before and after the classification, and should maintain that difference.

A bank can hedge risk in the banking book either directly through an external hedge or through internal risk transfer, according to the RBI.

The RBI has prescribed an SSA for calculating market-risk risk-weighted assets. The framework covers three broad risk classes: interest-rate risk, equity risk and foreign-exchange risk.

The RBI has additionally stated banks will have to meet market-risk capital requirements continuously, at the closing bell of each business day.

The RBI further stated that it has the option to exclude certain structural foreign currency investments from the calculation of Net Open Position (NOP), on both a standalone and consolidated basis. The bank may opt to exclude structural foreign exchange positions from NOP on a case-to-case basis, provided it complies with certain criteria, which include that the exclusion is made for at least six months, among others.

The RBI stated banks will additionally have to recalculate the eligible structural exemption on a quarterly basis.

The new directions will come into effect from April 1, 2027.