)
To deepen the derivatives market, the Reserve Bank of India (RBI) has issued an operational guidance on novation.
Novation is the legal term for replacing an obligation to perform with a new one or replacing a party to an agreement with a new one.
RBI says a bank can novate a derivative contract only after this has been held by the lender for at least six months if the original maturity was up to a year. Or, at least nine months for a contracts with an original maturity of more than a year.
The condition is not to apply where the transferor bank is winding up the business. And, the other party must be a constituent borrower. The latter is to do an independent examination (“due diligence”) in a required manner.
