MUMBAI: Following the stock exchanges reducing the trade settlement time from two days to one day, (T+1) and now in select equities T+0, the Reserve Bank on Friday reduced the maximum risk to the custodian banks issuing irrevocable payment commitments (IPCs) to 30% from the existing 50%.
The monetary authority in a notification to all commercial banks said the move is on the assumption of downward price movement of the equities bought by foreign institutional investors/mutual funds on the two successive days from the trade date.
The notification further said the risk mitigation measures prescribed in the December 2011 circular were based on T+2 rolling settlement for equities. But since stock exchanges have now introduced T+1 rolling settlement, the extant guidelines on IPC issuance have been reviewed.
Henceforth, all IPCs issued by custodian banks under the T+1 settlement cycle the clause giving banks an inalienable right over securities to be received as payout in any settlement will not be insisted if the transactions are pre-funded.
The notification further said, “the maximum intraday risk to banks issuing IPCs will be reckoned as capital market exposure at 30% of the settlement amount assuming 20% downward price movement of the equities on T+1, with an additional margin of 10 per cent for further downward price movement.”
In the margin money is paid in cash, the exposure will be reduced by the amount of the margin paid.