Issuing Authority: Reserve Bank of India — Department of Regulation, Market Risk Group
Date of Release: August 7, 2026 (Press Release 2026-2027/836)
Proposed Effective Date: April 1, 2027 (not yet in force)
Comment Deadline: August 28, 2026
Introduction & Background
Whenever a bank enters into a derivative contract or a securities financing transaction, it carries counterparty credit risk — the chance that the other side defaults before the contract matures. Credit Valuation Adjustment, or CVA, is the market-value adjustment banks make to account for exactly this risk: it lowers the "clean" value of a derivative to reflect the possibility that the counterparty won't pay. CVA risk, in turn, is the risk that this adjustment itself moves adversely as counterparty credit spreads and market factors shift — and it is this volatility that the CVA capital charge is designed to cushion against.
India's existing CVA capital framework dates back to 2011, built on Basel Committee on Banking Supervision (BCBS) standards issued in 2010 as part of the original Basel III package. Since then, the BCBS has issued revised, more risk-sensitive CVA guidelines under the final Basel III framework. RBI's draft Directions bring Indian regulation in line with that global standard by introducing the Basic Approach for CVA (BA-CVA) as the mandatory default methodology for computing the CVA capital charge.
At a high level, the draft requires banks to adopt either the full or reduced version of BA-CVA, while carving out a simplified alternate treatment for banks whose non-centrally cleared derivatives book is relatively small. It also recalibrates supervisory risk weights by sector and credit quality, clarifies the eligibility and recognition criteria for CVA hedges, and introduces new semiannual Pillar 3 disclosure templates.
Chapter I: Preliminary
A. Short Title and Commencement
The Directions will be titled the Reserve Bank of India (Commercial Banks – Credit Valuation Adjustment Framework) Directions, 2026. As drafted, they are proposed to come into force on April 1, 2027.
B. Applicability
The Directions apply to "Commercial Banks" — a defined term covering banking companies other than Small Finance Banks, Payments Banks and Local Area Banks, corresponding new banks, and the State Bank of India, as identified under clauses (c), (da) and (nc) of Section 5 of the Banking Regulation Act, 1949.
C. Definitions
- Banking Book / Trading Book / Netting Set / QCCP / SFT — each carries the same meaning as under the RBI (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025.
- Covered Transactions — all derivatives, except those with a qualifying central counterparty (QCCP), and except certain transactions exempted under paragraphs 85(6)(i)(f) and 85(6)(i)(g) of the 2025 Prudential Norms Directions.
- Credit Valuation Adjustment (CVA) — the counterparty-level adjustment to a derivative's or SFT's default-risk-free value to reflect potential counterparty default. Regulatory CVA differs from accounting CVA: it excludes the bank's own default risk and reflects certain accounting-CVA best-practice constraints.
- CVA risk — the risk of loss from changes in CVA values driven by counterparty credit spreads and market risk factors.
- Derivative — as defined under Section 45U(a) of the RBI Act, 1934.
Chapter II: Scope of Application
Banks must compute the CVA capital requirement on a standalone basis, covering the entire portfolio of covered transactions and eligible CVA hedges, across both the banking book and the trading book. Securities Financing Transactions (SFTs), while defined and relevant elsewhere in the framework, are specifically excluded from the CVA capital charge calculation itself.
Chapter III: Approaches for CVA Risk Capital Charge
A. Basic Approach (BA-CVA)
BA-CVA is the default, mandatory approach for computing the CVA capital charge, subject to the alternate treatment carve-out below. Detailed worked illustrations of the BA-CVA computation are provided in Annex 1 of the draft.
B. Alternate Treatment
A bank whose aggregate notional amount of non-centrally cleared derivatives is ≤ ₹10 lakh crore may choose not to run the BA-CVA computation at all, and instead adopt the alternate treatment — provided the supervisor has not determined that the bank's CVA risk materially contributes to its overall risk profile (in which case the option can be withdrawn).
Under the alternate treatment: the CVA capital requirement is set at 100% of the bank's counterparty credit risk (CCR) capital requirement, computed under the draft Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Amendment Directions, 2026 (the parallel draft SA-CCR framework); CVA hedges cannot be recognised; and the treatment must be applied to the bank's entire portfolio of covered transactions — it cannot be mixed selectively with BA-CVA.
C. Capital Requirements and Risk-Weighted Assets
The applicable capital charge depends on the route chosen: 100% of CCR capital (alternate treatment), the reduced BA-CVA formula, or the full BA-CVA formula. Whichever route applies, the resulting risk-weighted assets (RWA) for CVA risk are calculated by multiplying the capital charge by 12.5.
Chapter IV: CVA Risk Capital Charge under BA-CVA
A bank may choose either the full or reduced version of BA-CVA. Notably, even a bank implementing the full version must still compute the reduced-version figure (Kreduced), because it feeds into the full-version formula as a conservative floor on how much hedge recognition is allowed.
A. Reduced Version of BA-CVA (hedges not recognised)
Designed for banks that do not hedge CVA risk, this is the simpler of the two versions. The capital charge equals a discount scalar of 0.65 multiplied by an aggregate risk figure, Kreduced, that combines each counterparty's stand-alone CVA capital requirement (SCVAc) using a supervisory correlation assumption of 50% between counterparties' credit spreads.
Each counterparty's stand-alone CVA capital requirement is built from: a supervisory risk weight reflecting the counterparty's sector and credit quality; the netting set's effective maturity; its exposure at default (EAD, computed the same way as under SA-CCR); a supervisory discount factor based on a 5% discount rate; and a multiplier of 1.4 (the same alpha used to convert EAD back toward expected positive exposure under SA-CCR).
Credit quality is investment grade (IG) for a long-term rating of BBB-/Baa3 or short-term A-3/P-3/F-3 and above; anything below is high yield (HY). Where a counterparty has more than one rating, the worst governs; unrated counterparties get the NR weight.
Effective maturity is generally floored at one year. For instruments outside a netting agreement, maturity equals the instrument's own remaining term; within a netting agreement, it is the notional-weighted average maturity of the transactions inside it. The one-year floor is waived for fully or nearly-fully collateralised OTC derivatives of under one year's original maturity that carry daily re-margining clauses — but the replacement floor depends on structure: transactions outside a netting agreement instead floor at the greater of one day and their own effective maturity, while transactions inside a netting agreement instead use a minimum holding-period floor drawn from Table 29 of the 2025 Prudential Norms Directions.
B. Full Version of BA-CVA (hedges recognised)
The full version is intended for banks that actively hedge CVA risk. Only three hedge types are eligible: single-name credit default swaps (CDS), single-name contingent CDS, and index CDS — and a single-name CDS only qualifies if it references the counterparty directly, references a legally related entity (a parent/subsidiary relationship), or shares the counterparty's sector and region.
The full-version capital charge again applies the 0.65 discount scalar, this time to Kfull, which blends Kreduced and a hedge-adjusted figure, Khedged, using a supervisory weight β of 25% on Kreduced and 75% on Khedged. This 25% floor exists specifically to cap how much hedging can shrink the capital requirement — hedging can never bring the charge to zero.
Within Khedged, single-name hedge recognition (SNHc) is scaled by a supervisory correlation between the counterparty's and the hedge's credit spread: 100% where the hedge references the counterparty directly, 80% where legally related, and 50% where it merely shares sector and region. Index hedge recognition (IH) uses the same Table 1 risk weights, discounted by a further 30% to reflect the diversification benefit of an index. A separate hedging-misalignment term ensures that indirect hedges — ones that don't perfectly track the counterparty's own spread — can only ever partially offset the capital charge.
Chapter V: Capital Treatment of CVA Hedges
External Hedges
All external CVA hedges — eligible or not — are folded into the CVA calculation for the counterparty providing the hedge. Eligible external hedges are then excluded from the bank's market risk capital requirement; ineligible ones are instead treated as ordinary trading book instruments and capitalised for market risk.
Internal Hedges
Where a bank hedges internally — offsetting positions between its CVA desk and a trading desk — an ineligible internal hedge simply cancels out within the trading book, with no capital impact either way. An eligible internal hedge, however, splits: the CVA desk's leg is capitalised for CVA risk, while the trading desk's leg is separately capitalised for market risk.
Chapter VI: Disclosures and Reporting Requirements
- Table CVAA — qualitative disclosure of CVA risk management objectives, hedging policy, and whether the bank uses the alternate treatment. Annual, flexible format. Mandatory for every bank subject to CVA capital requirements, including those using the alternate treatment.
- Template CVA1 — RWA components (systematic, idiosyncratic, total) under the reduced BA-CVA. Semiannual, fixed format. Mandatory for banks on the reduced version — banks must also describe hedge types used even though the reduced version doesn't recognise them.
- Template CVA2 — Kreduced, Khedged, and total RWA under the full BA-CVA. Semiannual, fixed format. Mandatory for banks on the full version.
Chapter VII: Repeal
On the date these Directions come into effect (proposed as April 1, 2027), para 85(3) of the RBI (Commercial Banks – Prudential Norms on Capital Adequacy) Directions, 2025 will stand repealed.
Annex 1: What the Worked Examples Show
The draft includes two fully worked illustrations using a common two-counterparty portfolio (a bank counterparty with a 3-year, ₹1,000 crore exposure at 5% risk weight, and a corporate counterparty with a 2-year, ₹600 crore exposure at 3% risk weight):
In this illustration, adding eligible single-name hedges cuts the capital charge by roughly 41% — but note the charge still doesn't fall anywhere close to zero, because of the 25% β-floor on hedge recognition built into the full-version formula.
Key Changes: 2011 CVA Framework vs. Draft 2026 BA-CVA Framework
Compliance Checklist
☑ Check whether aggregate non-centrally cleared derivatives notional is ≤ ₹10 lakh crore — if so, evaluate opting into the alternate treatment
☑ If BA-CVA applies, decide full vs. reduced version — but build the Kreduced calculation regardless, since it feeds Kfull
☑ Map every derivative counterparty to one of the eight Table 1 sectors and assign the correct IG/HY/NR risk weight
☑ Review the existing CDS hedge book against the new eligibility criteria — direct reference, legal relation, or same sector/region
☑ Rebuild netting-set effective maturity calculations, including the daily re-margining exemption to the one-year floor
☑ Set up Pillar 3 reporting workflows for Table CVAA (annual) and Template CVA1/CVA2 (semiannual) ahead of the proposed April 1, 2027 effective date
☑ Submit comments on the draft, if any, before August 28, 2026 via the 'Connect 2 Regulate' portal or by email to the Market Risk Group, Department of Regulation
☑ Confirm SFT exposures are correctly excluded from the CVA capital charge calculation, and classify existing external and internal CVA hedges under the Chapter V capital treatment rules (eligible vs. ineligible, external vs. internal)
CorpLawUpdates Analysis
The most consequential shift here isn't the formula itself — it's the mandatory computation of Kreduced even for banks running the full version. By design, RBI has ensured no bank can hedge its way to a near-zero CVA charge: the 25% β-floor guarantees that at least a quarter of the unhedged capital requirement survives regardless of how well-hedged a bank's book is. Treasury desks that assumed aggressive CDS hedging would meaningfully compress CVA capital should recalibrate that expectation now, not after the comment window closes.
The ₹10 lakh crore alternate-treatment threshold deserves close attention from mid-sized banks. It's a bright-line test, but the proviso allowing the supervisor to withdraw the option where CVA risk is "material" to the bank's overall risk profile introduces a judgment call that isn't fully specified in the draft. Banks near the threshold, or with concentrated derivative exposures despite modest overall notional, would be well served flagging this ambiguity in their comment submissions.
Operationally, the compliance lift is significant even for banks that ultimately qualify for the alternate treatment — Table CVAA disclosure is mandatory regardless of which route a bank takes. Banks that have historically treated CVA as a quant/market-risk-desk concern will need compliance and disclosure teams looped in well before the proposed April 1, 2027 effective date, given the semiannual cadence of Templates CVA1 and CVA2.
Watch for two things going forward: first, whether the final Directions retain the "XX" placeholder circular number as-is or RBI issues a cleaner reference upon finalisation — draft numbering sometimes shifts materially between draft and final stages. Second, the interaction with the still-draft Reserve Bank of India (Commercial Banks – Forthcoming Instructions) Amendment Directions, 2026 referenced throughout (for EAD and CCR capital computation) — both frameworks are moving in parallel, and banks should track them together rather than in isolation.
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. Verify with primary regulatory sources before acting.
