IFSCA notifies Qualified Financial Contracts under the Bilateral Netting of Qualified Financial Contracts Act, 2020

IFSCA notifies “Qualified Financial Contracts” under the Bilateral Netting of Qualified Financial Contracts Act, 2020 (BNQFC)

Netting enables two counterparties in a bilateral financial contract to offset claims against each other to determine a single net payment obligation due from one counterparty to other. The legal framework for enforceability of netting laid down by the BNQFC Act aims to reduce credit exposure of banks and other financial institutions from gross to net exposure, resulting in substantial capital saving on such exposure and reducing the overall systemic risks, thereby contributing to the financial stability.

The Act delegates to the respective regulatory authorities the power to designate, by notification, any bilateral agreement or contract or transaction or type of contract regulated by it as “qualified financial contract” and specify any entity regulated by it as a “qualified financial market participant” to deal in such contract. IFSCA has been designated as one of the relevant authorities under the Act.

IFSCA has notified a wide and inclusive definition of “qualified financial contract”. Moreover, since many of the OTC derivatives contracts and other financial transactions are entered into on the basis of standard documentation like International Swaps and Derivatives Association (ISDA) master agreement, such agreements too have been included in the definition of the term “qualified financial contract”. The term “qualified financial market participant”, as defined in the Act, already includes all financial institutions established at IFSCs and therefore has not been separately defined in the notification.

Along with the other advantages offered by IFSC for trading in OTC derivatives, the above dispensation is expected to further facilitate the goal of IFSC as a hub for offshore trading in INR derivatives.

February 5, 2021


Gandhinagar, the 2nd February, 2021

IFSCA/2020-21/GN/008.—In exercise of the powers conferred by sub-section (a) of Section 4 of the Bilateral Netting of Qualified Financial Contracts Act, 2020 (30 of 2020), the Authority hereby designates the following as Qualified Financial Contract :

“Qualified financial contract” means any privately negotiated bilateral financial contract executed outside a stock exchange, including any terms and conditions incorporated by reference in any such financial contract, pursuant to which payment or delivery obligations that have a market price are due to be performed at a certain time or within a certain period of time and includes

(i) a currency, cross-currency or interest rate swap;
(ii) a basis swap;
(iii) a spot, forward or other foreign exchange transaction;
(iv) a cap, collar or floor transaction;
(v) a commodity swap;
(vi) a forward rate agreement;
(vii) a currency or interest rate option;
(viii) a credit derivative, such as a credit default swap;
(ix) a spot, forward or other securities or commodities transaction;
(x) a securities contract, including a margin loan and an agreement to buy, sell, borrow or lend securities, such as a securities repurchase or reverse repurchase agreement, a securities lending agreement or a securities buy/sell-back agreement, including any such contract or agreement relating to mortgage loans, interests in mortgage loans or mortgage-related securities, a money market instrument;
(xi) a commodities contract, including an agreement to buy, sell, borrow or lend commodities, such as a commodities repurchase or reverse repurchase agreement, a commodities lending agreement or a commodities buy/sell-back agreement;
(xii) a collateral arrangement;
(xiii) an agreement to clear or settle securities transactions or to act as a depository for securities;
(xiv) any other agreement, contract or transaction similar to any agreement, contract or transaction referred to in paragraphs (i) to (xiii) with respect to one or more reference items or indices relating to, without limitation interest rates, currencies, commodities, interest, or precious metals; or
(xv) any other facility or agreement, contract or transaction designated as a qualified financial agreement by the Authority from time to time in addition to those listed above”



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