In exercise of the powers conferred by clause a of Section 4 of the Bilateral Netting of Qualified Financial Contracts Act

## Report on Qualified Financial Contracts Policy **1. Executive Summary:** This report analyzes a notification issued by the Reserve Bank of India (RBI) regarding Qualified Financial Contracts (QFCs). The notification, dated March 9, 2021, defines specific financial contracts as QFCs and designates certain entities as qualified financial market participants eligible to deal in these contracts, under the Bilateral Netting of Qualified Financial Contracts Act, 2020. Key findings indicate the RBI is expanding the scope of QFCs and clarifying the entities permitted to engage in transactions involving them, likely aiming to enhance market stability and reduce systemic risk through improved netting arrangements. **2. Introduction:** This report provides an informative overview of the Reserve Bank of India's notification regarding Qualified Financial Contracts, based solely on the text of the notification published in the Gazette of India on March 18, 2021. The report aims to clarify the key provisions of the notification, its intended audience, and potential impacts. **3. Policy Overview:** This is a *new* policy notification further defining elements of the Bilateral Netting of Qualified Financial Contracts Act, 2020. The core objective, as inferred from the text, is to specify which financial contracts qualify as QFCs and which entities are qualified to participate in this market. **4. Background and Rationale:** Given that this notification supplements the Bilateral Netting of Qualified Financial Contracts Act, 2020, it can be inferred that the RBI seeks to provide clarity and specificity regarding the types of contracts and participants to which the Act applies. The notification likely aims to foster greater certainty and efficiency in the QFC market, facilitating netting arrangements and reducing counterparty risk. **5. Key Provisions / Changes:** This is a New Policy, and the notification defines: * **Qualified Financial Contracts:** The following are designated as Qualified Financial Contracts: * Derivatives, as defined under Section 45U of the Reserve Bank of India Act, 1934. * Repo and Reverse Repo, as defined under Section 45U of the Reserve Bank of India Act, 1934. * **Qualified Financial Market Participants:** The following entities are specified as qualified financial market participants to deal in qualified financial contracts: * Entities licensed by RBI to do banking business, but not included in the second schedule to the Reserve Bank of India Act, 1934. * Export-Import Bank of India. * National Bank for Agriculture and Rural Development. * Small Industries Development Bank of India. * National Housing Bank. * Factors as defined in Section 2 i of the Factoring Regulation Act, 2011. * Asset Reconstruction Companies as defined under section 2 1 ba of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. **6. Target Audience and Stakeholders:** The primary target audience and stakeholders directly affected by this notification include: * Financial institutions engaged in derivative, repo, and reverse repo transactions. * Entities licensed by RBI to do banking business, but not included in the second schedule to the Reserve Bank of India Act, 1934. * Export-Import Bank of India. * National Bank for Agriculture and Rural Development. * Small Industries Development Bank of India. * National Housing Bank. * Factors. * Asset Reconstruction Companies. * The Reserve Bank of India itself, in its regulatory and supervisory role. **7. Implementation Aspects (Inferred):** * **Responsible Agency:** The Reserve Bank of India (RBI) is the responsible agency for implementing and overseeing this notification. Specifically, the Financial Markets Regulation Department of the RBI. * **Timelines/Procedures:** The notification takes effect immediately, as it was issued on March 9, 2021. The notification establishes the definitions and designations; therefore, compliance is expected from the specified date forward. The text does not specify explicit procedures. **8. Expected Outcomes / Impact of Changes:** The likely intended outcomes and potential impact of this notification include: * Increased clarity and legal certainty regarding which contracts and participants fall under the Bilateral Netting of Qualified Financial Contracts Act, 2020. * Reduced counterparty risk and enhanced financial stability through the promotion of efficient netting arrangements. * Greater participation in the QFC market by a wider range of financial institutions. * Improved risk management practices among financial market participants. **9. Conclusion:** The RBI's notification of March 9, 2021, concerning Qualified Financial Contracts represents a significant step in clarifying the scope of the Bilateral Netting of Qualified Financial Contracts Act, 2020. By defining specific financial contracts as QFCs and designating eligible participants, the notification contributes to a more robust and resilient financial market. The notification's significance lies in its potential to reduce systemic risk and enhance the overall stability of the financial system.

Key Entities Referenced