RBI proposes revised CVA framework under Basel III, offers simpler capital calculation for eligible banks

The Reserve Bank of India (RBI) on Friday proposed a revised framework for Credit Valuation Adjustment (CVA) to make the capital requirement for derivative exposures more risk-sensitive and aligned with global Basel III standards. The draft norms also introduce a simplified calculation methodology for eligible banks, aiming to improve consistency while reducing compliance burden for institutions with relatively lower derivatives exposure.

CVA reflects the adjustment made to the default risk-free value of derivative contracts to account for the possibility that a counterparty may default before the contract matures. Since movements in counterparties' credit quality can significantly affect the value of derivatives, banks are required to maintain capital against such risks to safeguard financial stability.

The existing CVA framework, introduced by the RBI in 2011, was based on the Basel Committee on Banking Supervision's (BCBS) 2010 standards. However, following the BCBS' revised guidelines under the final Basel III framework, the central bank has now proposed an updated regime that enhances risk sensitivity and brings Indian regulations closer to international best practices.

Under the draft directions, banks will be permitted to adopt the Basic Approach for Credit Valuation Adjustment (BA-CVA), with the flexibility to choose either the full or reduced version depending on their business profile and risk exposure.

The RBI also proposed an alternative treatment for banks with an insignificant volume of non-centrally cleared derivatives. In line with BCBS guidelines, such lenders may calculate their CVA capital charge as 100% of their counterparty credit risk (CCR) capital charge, offering a simpler compliance pathway.

The draft further clarifies the eligibility and recognition of CVA hedges and proposes greater differentiation in supervisory risk weights based on counterparties' sector and credit quality. These changes are expected to improve the accuracy of capital requirements by better reflecting the underlying risk profile of derivative counterparties.

The central bank said banks with an aggregate notional amount of non-centrally cleared derivatives of ₹10 lakh crore or less may opt not to calculate their CVA capital requirements using the BA-CVA framework and instead choose the alternative treatment prescribed under the draft.

The RBI has invited comments on the proposed directions from regulated entities, market participants and other stakeholders until August 28, 2026, after which the framework will be finalised.