RBI Issues Draft Directions on Novation of OTC Derivatives 2025

PR No. 2025-2026/682; Dated: 09.07.2025

The Reserve Bank of India (RBI) has published the draft ‘Novation of OTC Derivative Contracts’ Directions, 2025 on its official website. These directions aim to establish a regulatory framework for the novation process in Over-the-Counter (OTC) derivative contracts, ensuring transparency, legal clarity, and operational efficiency.

1. Understanding Novation in OTC Derivatives

The term ‘Novation’ refers to the process of replacing an existing market maker in an OTC derivative contract with another market maker. This involves three key parties:

• Transferor – The market maker who exits the existing contract.
• Remaining Party – The original counterparty who continues in the deal.
• Transferee – The new market maker stepping into the contract.

Novation results in the termination of the original contract and the creation of a new contract between the remaining party and the transferee.

2. Key Provisions of the Draft Directions

The draft directions lay down detailed guidelines for the novation process, including:

1. Eligibility Conditions – Only RBI-approved market participants can engage in novation.
2. Documentation Requirements – All novation transactions must be supported by standardised legal agreements clearly outlining the roles, obligations, and timelines for each party.
3. Reporting Obligations – Parties must report novated transactions to Trade Repositories (TRs) or any other authority as specified by the RBI within the prescribed timeline.
4. Operational Mechanisms – The directions specify the step-by-step procedures for executing novation, including prior consent requirements and validation of trade terms.

3. Stakeholder Feedback Invited

The RBI has invited comments and suggestions from market participants, industry stakeholders, and the public on the draft directions. Feedback must be submitted on or before August 1, 2025.

4. Significance of the Move

By formalising the novation process, RBI seeks to:

• Enhance counterparty risk management,
• Improve market liquidity and trade flexibility, and
• Align with global best practices in derivatives regulation.

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